Does inward FDI influence the quality of domestic institutions? A cross-country panel analysis

Roberto Antonietti and Jasmine Mondolo

No 1842, Papers in Evolutionary Economic Geography (PEEG) from Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography

Abstract: Domestic institutions are recognized as important in attracting foreign direct investment (FDI) and spurring economic development in host countries, but FDI can also affect and shape domestic institutions. In this paper we use extensive data on the quality of institutions and on inward FDI in 127 countries over a period of 22 years to see whether attracting FDI improves the quality of institutions in the host economies. We distinguish between different types of institution, FDI and country, and we estimate a series of pooled ordinary least squares, fixed effects, and dynamic panel data models to address endogeneity. Our findings suggest that higher amounts of inward FDI improve the average quality of institutions in recipient countries. This holds particularly when the quality of institutions is measured in terms of political stability, regulatory quality and rule of law, and when host countries are developing or transition economies.

Keywords: quality of institutions; foreign direct investment; panel data (search for similar items in EconPapers)
JEL-codes: F23 F63 O43 O57 (search for similar items in EconPapers)
Date: 2018-12, Revised 2018-12
New Economics Papers: this item is included in nep-int and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:egu:wpaper:1842

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