IDEAS home Printed from https://ideas.repec.org/a/sek/jijoes/v9y2020i2p55-70.html
   My bibliography  Save this article

Institutions and foreign direct investment: A Panel VAR approach

Author

Listed:
  • Ichraf Ouechtati

    (Faculty of Law, Economics and Management Sciences of Jendouba)

Abstract

This paper employs panel vector autoregression model (PVAR) for a panel of 90 developing countries over 17 years (2000-2016) to empirically examine the relationship between institutional shocks and foreign direct investment (FDI). The study finds that institutional shocks have a negative impacts on FDI. Generally, the effect begins to mitigate from the fourth year. This result could be explained mainly by the instability of institutional variables « Regulation of credit, labor and business » and « government size » in the case of FDI inflows and outflows. The effect is higher in the case of FDI inflows. This suggests that investors already settled in developing countries are less sensitive to institutional shocks. Also, results reveal that the negative impact of institutional shocks on net FDI is explained by the instability of legal structure and property rights and access to sound money.

Suggested Citation

  • Ichraf Ouechtati, 2020. "Institutions and foreign direct investment: A Panel VAR approach," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 9(2), pages 55-70, December.
    • Handle: RePEc:sek:jijoes:v:9:y:2020:i:2:p:55-70
    as

    Download full text from publisher

    File URL: https://iises.net/international-journal-of-economic-sciences/publication-detail-25609
    Download Restriction: no
    File URL: https://iises.net/international-journal-of-economic-sciences/publication-detail-25609?download=4
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Trevino, Len J. & Thomas, Douglas E. & Cullen, John, 2008. "The three pillars of institutional theory and FDI in Latin America: An institutionalization process," International Business Review, Elsevier, vol. 17(1), pages 118-133, February.
    2. Canova, Fabio & Ciccarelli, Matteo, 2013. "Panel Vector Autoregressive Models: A Survey," CEPR Discussion Papers 9380, C.E.P.R. Discussion Papers.
    3. Hsu, Judy & Tiao, Yu-En, 2015. "Patent rights protection and foreign direct investment in Asian countries," Economic Modelling, Elsevier, vol. 44(C), pages 1-6.
    4. Michael R. M. Abrigo & Inessa Love, 2016. "Estimation of panel vector autoregression in Stata," Stata Journal, StataCorp LP, vol. 16(3), pages 778-804, September.
    5. Globerman, Steven & Shapiro, Daniel, 2002. "Global Foreign Direct Investment Flows: The Role of Governance Infrastructure," World Development, Elsevier, vol. 30(11), pages 1899-1919, November.
    6. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
    7. Azmat Gani, 2007. "Governance and foreign direct investment links: evidence from panel data estimations," Applied Economics Letters, Taylor & Francis Journals, vol. 14(10), pages 753-756.
    8. Sotirios Bellos & Turan Subasat, 2012. "Corruption And Foreign Direct Investment: A Panel Gravity Model Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 64(4), pages 565-574, October.
    9. Buchanan, Bonnie G. & Le, Quan V. & Rishi, Meenakshi, 2012. "Foreign direct investment and institutional quality: Some empirical evidence," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 81-89.
    10. Jensen, Nathan M., 2003. "Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment," International Organization, Cambridge University Press, vol. 57(3), pages 587-616, July.
    11. Zühal Kurul & A. Yasemin Yalta, 2017. "Relationship between Institutional Factors and FDI Flows in Developing Countries: New Evidence from Dynamic Panel Estimation," Economies, MDPI, vol. 5(2), pages 1-10, May.
    12. Douglas P Woodward & Robert J Rolfe, 1993. "The Location of Export-Oriented Foreign Direct Investment in the Caribbean Basin," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 24(1), pages 121-144, March.
    13. Peter J. Buckley & Mark Casson, 1991. "The Future of the Multinational Enterprise," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-1-349-21204-0, December.
    14. John H Dunning, 1998. "Location and the Multinational Enterprise: A Neglected Factor?," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(1), pages 45-66, March.
    15. Li, Quan & Resnick, Adam, 2003. "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries," International Organization, Cambridge University Press, vol. 57(1), pages 175-211, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. KRULICKÝ Tomáš & FILHO Eduardo Aguiar Henrique & HROMADA Eduard & ČERMÁKOVÁ Klára, 2022. "The Effects of Homeownership on Wealth Distribution," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 01, March.
    2. Klára Čermáková & Eduard Hromada, 2022. "Change in the Affordability of Owner-Occupied Housing in the Context of Rising Energy Prices," Energies, MDPI, vol. 15(4), pages 1-18, February.
    3. Leila Kadagishvili & Rusudan Maisuradze, 2022. "Impact of Regional integration on Trade and Economic Cooperation – a key study of Georgia and Azerbaijan," International Journal of Economic Sciences, European Research Center, vol. 11(2), pages 58-79, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bailey, Nicholas, 2018. "Exploring the relationship between institutional factors and FDI attractiveness: A meta-analytic review," International Business Review, Elsevier, vol. 27(1), pages 139-148.
    2. Bersan Haliti & Safet Merovci, 2020. "The Impact of the Investment Environment on Foreign Direct Investment (FDI) in the European Transition Economies," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 1, pages 138-147, March.
    3. Zühal Kurul & A. Yasemin Yalta, 2017. "Relationship between Institutional Factors and FDI Flows in Developing Countries: New Evidence from Dynamic Panel Estimation," Economies, MDPI, vol. 5(2), pages 1-10, May.
    4. Bouchoucha, Najeh & Yahyaoui, Ismahen, 2019. "Governance and Foreign Direct Investment : A comparative Analysis between Low and Middle Income African Countries," MPRA Paper 95944, University Library of Munich, Germany.
    5. Helmi Hammami & Moez Hammami & Siriki Coulibaly & Mariem Marzouk, 2020. "Determinants of FDI attractiveness: A MCI model approach," Economics Bulletin, AccessEcon, vol. 40(2), pages 1033-1048.
    6. Uddin, Moshfique & Chowdhury, Anup & Zafar, Sheeba & Shafique, Sujana & Liu, Jia, 2019. "Institutional determinants of inward FDI: Evidence from Pakistan," International Business Review, Elsevier, vol. 28(2), pages 344-358.
    7. Turan Subasat & Sotirios Bellos, 2013. "Governance and foreign direct investment in Latin America: A panel gravity model approach," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 50(1), pages 107-131, May.
    8. Younsi, Moheddine & Bechtini, Marwa, 2019. "Do institutions and good governance affect inward FDI? Empirical evidence from emerging countries," MPRA Paper 94815, University Library of Munich, Germany.
    9. Fathi Ali & Norbert Fiess & Ronald MacDonald, 2010. "Do Institutions Matter for Foreign Direct Investment?," Open Economies Review, Springer, vol. 21(2), pages 201-219, April.
    10. Dimitra Mitsi & Constantina Kottaridi, 2022. "Fiscal and non-fiscal institutional context effects and foreign direct investment: empirical evidence in developing countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 72(1-2), pages 11-33, January-J.
    11. Federico Carril-Caccia & Juliette Milgram Baleix & Jordi Paniagua, 2019. "The foreign direct investment-institution nexus in oil-abundant countries," Working Papers 1903, Department of Applied Economics II, Universidad de Valencia.
    12. Omer Ali Ibrahim & Sonal Devesh & Mughees Shaukat, 2022. "Institutional determinants of FDI in Oman: Causality analysis framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4183-4195, October.
    13. Federico Carril-Caccia & Juliette Milgram-Baleix & Jordi Paniagua, 2019. "Foreign Direct Investment in oil-abundant countries: The role of institutions," PLOS ONE, Public Library of Science, vol. 14(4), pages 1-23, April.
    14. Asamoah, Michael Effah & Adjasi, Charles K.D. & Alhassan, Abdul Latif, 2016. "Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa," Economic Systems, Elsevier, vol. 40(4), pages 612-621.
    15. Akhtaruzzaman, M. & Berg, Nathan & Hajzler, Christopher, 2017. "Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?," European Journal of Political Economy, Elsevier, vol. 49(C), pages 84-107.
    16. Céline Azémar & Rodolphe Desbordes, 2009. "Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 18(4), pages 667-709, August.
    17. Bashir Muhammad & Muhammad Kamran Khan, 2023. "Do Institutional Quality and Natural Resources Affect the Outward Foreign Direct Investment of G7 Countries?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(1), pages 116-137, March.
    18. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 41-61.
    19. Basu, Debarati & Mitra, Shabana & Purohit, Archana, 2023. "Does effective democracy explain MNE location choice?: Attractiveness to FDI and cross-border M&As," Journal of Business Research, Elsevier, vol. 167(C).
    20. Photis Lysandrou & Offiong Helen Solomon & Thomas Goda, 2016. "The Differential Impact of Public and Private Governance Institutions on the Different Modes of Foreign Investment," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(6), pages 729-746, November.

    More about this item

    Keywords

    Institutions; Foreign direct investment; Panel VAR;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sek:jijoes:v:9:y:2020:i:2:p:55-70. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klara Cermakova (email available below). General contact details of provider: https://ijoes.iises.net/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.