Foreign direct investment (FDI) and control of corruption: does good governance matter?

Farzana Naheed Khan ()
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Farzana Naheed Khan: Quaid-i-Azam University

International Journal of Economic Policy Studies, 2025, vol. 19, issue 2, No 4, 333-354

Abstract: Abstract This study investigates the impact of foreign direct investment inflows on the control of corruption index (CCI) by incorporating the role of governance, using a panel of SAARC countries over the period 1996–2022. The study includes three dimensions of the quality of governance: economic, institutional and political governance and constructs a governance quality index through principal component analysis. Additionally, the study employs the generalized method of moments estimation technique with panel corrected standard errors to address the issues of unobserved heterogeneity among different countries, cross-sectional dependence in the data, and endogeneity among the variables. The study finds from non-interactive regressions that FDI negatively influences CCI while the quality of governance positively influences CCI. However, interactive regressions suggest that the interaction between FDI inflows and good governance supports the control of corruption. Based on these findings, it is concluded that good governance is a necessary condition through which FDI controls corruption. Since good governance complements FDI and supports the control of corruption, it is submitted that SAARC countries should pay attention to the improvement of their quality of governance in order to enhance the control of corruption.

Keywords: FDI inflows; Control of corruption; Good governance; Governance quality index; Panel corrected standard errors; SAARC (search for similar items in EconPapers)
JEL-codes: F10 F21 H11 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s42495-025-00154-6

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