Can Better Institutions Attract More Foreign Direct Investment (FDI)? Evidence from Developing Countries

Abstract

This paper tries to fill up the gap in the literature explaining Foreign Direct Investment (FDI) flows in developing countries by emphasising the role or quality of institutions, often unaddressed in current empiricism, yet of paramount importance. Control of corruption, better rule of law, political stability and better free- dom of expression of the media are used as indicators of good governance and institutional quality in this research endeavour. A selection of 45 developing countries in the African, Latin American and Asian regions is undertaken in our empirical analysis. After having controlled for the usual variables and performed a battery of robustness tests, under multiple scenarios, the findings primarily prompt us to conclude that the quality of some institutions in the host country has an enormous impact on inward FDI. Furthermore, as the different institutional indicators are complementary to each other, their combined effect is found to reinforce the level of FDI inflows to the host country.