Do institutions and good governance affect inward FDI? Empirical evidence from emerging countries

This study seeks to strengthen the existing literature by investigating the relationship between governance indicators and FDI inflows for the emerging countries (ECs) using a dynamic panel gravity model approach over the period 1996~2014. The empirical results reveal that among the six indicators of good governance, political stability, government effectiveness and regulatory quality are found to be robust determinants for FDI attractiveness in Emerging countries. The remaining three indicators, i.e. voice and accountability, rule of law, and control of corruption are found significantly and negatively associated with FDI inflows. The empirical results show also that larger per capita GDP difference between the investing partner and host country, high level of trade openness, low level of inflation rate, and better infrastructure are crucial factors to speed-up FDI inflows in ECs. However, this study provides strong evidence that ECs depict a large gap with regard to the quality of institutions and other macroeconomic factors and thereby their ability to attract FDI. To conclude, policymakers are required to improve the quality of institutions and business climate in order to attract more FDI in these countries