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Does good governance matter for FDI? New evidence from emerging countries using a static and dynamic panel gravity model approach
Author(s) -
Younsi Moheddine,
Bechtini Marwa
Publication year - 2019
Publication title -
economics of transition and institutional change
Language(s) - English
Resource type - Journals
eISSN - 2577-6983
pISSN - 2577-6975
DOI - 10.1111/ecot.12224
Subject(s) - foreign direct investment , openness to experience , attractiveness , corporate governance , gravity model of trade , quality (philosophy) , per capita , panel data , business , international economics , good governance , emerging markets , economics , econometrics , macroeconomics , psychology , social psychology , population , philosophy , demography , finance , epistemology , sociology , psychoanalysis
This paper assesses the impact of institutional factors on foreign direct investment ( FDI ) attractiveness using a pool of 25 emerging host countries ( EC s) for the period 1996–2012. In particular, the paper aims to examine whether higher institutional quality and good governance do improve FDI attractiveness, and thereby to identify which institutional factors are the main drivers of FDI in EC s. Using a static and dynamic panel gravity model with various estimation techniques, we find that FDI is positively and significantly influenced by political stability, government effectiveness and regulatory quality. The remaining set of governance indicators is found to be statistically significant and negatively linked to FDI . Our findings also show that factors like a larger GDP per capita difference between investing partner and EC s, higher degree of trade openness and better infrastructure have positive and significant effects on FDI attractiveness. These results have important policy implications for EC s. Fostering FDI inflows into these countries requires policymakers to improve the quality of their institutions and business climate through implementing sound economic policies and regulations.