Relationship between Foreign Direct Investment, Institutional Quality and Macroeconomic Variables

Abstract

Using a comprehensive panel data analysis of 110 countries over the time span 2002-2012, this study investigates the impact of institutional quality on foreign direct investment (FDI) by categorizing the countries into ‘developed’ and ‘developing’.The result findings related to developed countries show that a single standard deviation change in institutional quality raises FDI by a factor of 0.297 when legal origins are used as instruments. On the other hand, the results for the developing countries demonstrate that  institutions do not work endogenously with other types of law that govern a country due to an exogeneity issue associated with weak structure of institutions.

Keywords: Foreign Direct Investment; Institutions; Developed and Developing Countries

JEL Classification numbers : C23, F21, F23, O10