Do Financial Development, Institutional Quality and Natural Resources Matter the Outward FDI of G7 Countries? A Panel Gravity Model Approach

Samira Ben Belgacem (), Moheddine Younsi, Marwa Bechtini, Abad Alzuman and Rabeh Khalfaoui
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Samira Ben Belgacem: Department of Business Administration, College of Business and Administration, Princess Nourah bint Abdulrahman University, Riyadh 11671, Saudi Arabia
Moheddine Younsi: Department of Business Administration, College of Science and Humanities, Shaqra University, Dawadmi 11911, Saudi Arabia
Marwa Bechtini: Department of Business Administration, College of Science and Humanities, Shaqra University, Dawadmi 11911, Saudi Arabia
Abad Alzuman: Department of Business Administration, College of Business and Administration, Princess Nourah bint Abdulrahman University, Riyadh 11671, Saudi Arabia
Rabeh Khalfaoui: ICN Business School, CEREFIGE, Université de Lorraine, 54003 Nancy, France

Sustainability, 2024, vol. 16, issue 6, 1-24

Abstract: Given the global growth of foreign capital flows, foreign investments hold significant potential for achieving sustainable development. Thus, this paper aims to highlight the key factors of FDI. In particular, it analyzes the effects of financial development and natural resources on FDI and how institutional quality and institutional distance can moderate these effects. The study used the dynamic panel gravity framework with two-step system GMM estimators to assess whether the developed financial system, better institutions, and possessing natural resources influence the outward FDI of G7 countries to host countries over the period 2002–2021. The results show that a well-developed financial system and well-functioning institutions in host countries are important prerequisites for FDI inflows. We find that the relationship between financial development and FDI is positively and significantly moderated by both institutional quality and institutional distance. Contrarily, these factors negatively moderate the connection involving natural resources and FDI. The significant negative association between institutional indicators’ interaction with natural resources indicates that natural resources play a key role in FDI, while joint policies for institutions and natural resources considerably decrease FDI inflows. Moreover, we discover that factors like GDP per capita, logistics infrastructure, and population could attract and handle more FDI. Based on the findings, the study recommends that host governments should focus on policies that strengthen the financial system, reduce institutional and legislative barriers, and enhance institutional quality and business environment to grant foreign investors access to all areas of their economies. Moreover, host governments should brand separate policies for institutions and natural resources to improve their economic advantages.

Keywords: foreign direct investment; financial development; natural resources; institutional quality; institutional distance; panel gravity model (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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