Foreign direct investment and economic growth nexus in the presence of domestic institutions: a regional comparative analysis

Sami Ullah (), Kishwar Ali () and Muhammad Ehsan ()
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Sami Ullah: Shandong University
Kishwar Ali: Jiangsu University
Muhammad Ehsan: National University of Modern Languages

Asia-Pacific Journal of Regional Science, 2022, vol. 6, issue 2, No 12, 735-758

Abstract: Abstract Foreign direct investment (FDI) inflow is seen as a major source of external financing and a key factor in promoting economic growth, whereas sound institutions’ quality (IQ) not only directly enhances the economic growth, but also plays an essential role in strengthening the FDI–growth nexus of host countries. This research investigated the influence of FDI inflow and IQ on economic growth and further concentrated on the institutions’ role in FDI–growth nexus. We used a wider dataset of 80 countries from three developing regions, including Asia, Latin America and Caribbean and Sub-Saharan Africa (SSA), and estimated a dynamic panel model using the Generalized method of moment. This research showed that while both FDI inflows and IQ are significant factors in surging economic growth, FDI-led economic growth was higher in Asian and SSA countries. Similarly, the interaction of FDI with IQ also had a larger impact on the economic growth of Asia. Notably, the magnitude of the FDI influence on economic growth increased in all three regions when the interaction term IQ was introduced into the model. Additionally among the sub-factors of IQ, interaction of FDI with political stability and control of corruption was highly significant in promoting economic growth in all regions, while rule of law was negative, and regulatory quality and government effectiveness showed insignificant influences on FDI–growth nexus only in the case of SSA. The findings of the study are robust because different model specifications were applied.

Keywords: Economic growth; Foreign direct investment; Institutional quality; Asia; LAC; SSA (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s41685-022-00236-9

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