The Impact Of Institutional Factors On Foreign Direct Investment Inflows: Cross-Country Analysis

This research paper is devoted to analysis of various institutional factors as determinants of foreign direct investment (further – FDI) inflows to different countries. The objective of the research is to estimate the effect of institutions on FDI inflows. The analysis is provided on a database of cross-country FDI inflows on 72 countries FDI-importers and 112 countries FDI-exporters in the period from 2001 to 2016. It is supposed in the paper that the impact of institutional factors might be different for the groups of developed and developing countries; since developed economies have higher institutional indicators, they tend to attract larger amounts of foreign direct investment compared to developing economies, where institutional development is at the lower level. The estimation is based on the gravity approach, which considers the positive effects of countries’ GDP and the negative effect of the distance between them. The main method used for the econometric estimation is the Pseudo Poisson Maximum Likelihood (PPML) regression, which is considered to be one of the adequate methods for estimating such data. During the research the problems of zero-observations and correlation between institutional indicators are solved. The results have shown that higher quality of institutions tends to attract more foreign direct investment to a country. Thus, institutions in developed countries have positive and significant impact on FDI attraction. At the same time, the analysis of developing countries has shown that some institutions have less significant influence on the FDI inflows. Based on the results of the research, possible recommendations for government policy on institutional improvement can be suggested.