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Institutional Quality and Foreign Direct Investment Inflows: Evidence from Cross-country Data with Policy Implication

Author

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  • Chinmaya Behera
  • Bikash Ranjan Mishra
  • Biswashree Tanaya Priyadarsini
  • Lopamudra D. Satpathy

Abstract

Purpose: The study examines the impact of institutional quality on Foreign Direct Investment (FDI) inflows for emerging economies from South Asiain the period 2002-2016. Other economic factors such as globalisation, financial development, and GDP are also considered. Design/Methodology/Approach: The study uses Im-Pesaran-Shin (IPS) panel unit root test to check stationarity property. It uses cross dependency (CD) and cross-sectional augments IPS tests to check cross-sectional dependency and heterogeneity across the group countries. Next, it uses panel ARDL-PMG tests to check the existence of long-relationship among variables. Then, we apply the panel Granger causality test to check the direction of causality. Finally, for the robustness of results, we use the Pedroni co-integration technique. Findings: The study finds the existence of a long-run relationship between institutional quality and FDI inflows. Other economic factors such as globalization and financial development show long-run and strong causality with FDI inflows. However, the short-run unidirectional causality from institutional quality to FDI inflows is not found for all the countries. Finally, institutional quality strongly causes FDI inflows provided paired with either globalisation or financial development. Practical Implications: Institutional quality increases the FDI inflows. Therefore, policymakers should focus on institutional quality along with globalization and financial development for higher inflows of FDI in emerging countries. Originality/Value: The study considers institutional quality as one of the inputs for FDI inflows in selected emerging economies from South Asia. Further, it creates an institutional quality index for the emerging countries to examine the impact on FDI inflows.

Suggested Citation

  • Chinmaya Behera & Bikash Ranjan Mishra & Biswashree Tanaya Priyadarsini & Lopamudra D. Satpathy, 2020. "Institutional Quality and Foreign Direct Investment Inflows: Evidence from Cross-country Data with Policy Implication," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 302-316.
    • Handle: RePEc:ers:ijebaa:v:viii:y:2020:i:2:p:302-316
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    1. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2022. "Which are the long-run determinants of US outward FDI? Evidence using large long-memory panels," Working Papers 2022.08, International Network for Economic Research - INFER.

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    More about this item

    Keywords

    Institutional quality; FDI; ARDL; financial development; globalisation.;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F00 - International Economics - - General - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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