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Does Institutional Quality Affect Foreign Direct Investment? A Panel Data Analysis

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Inequality, Poverty and Development in India

Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

This study investigates the effects of the institutional quality along with socio-economic factors on foreign direct investment (FDI) of 156 countries using Ordinary Least Square (OLS) and Fixed Effect (FE) method. The findings of the study suggest that while corruption lowers FDI significantly, democracy, government stability, law and order, civil liberty and political rights have significant positive effects on FDI inflows. Results of the study also indicate that increased levels of educational attainment and openness in a trade regime lead to a higher level of FDI. Thus the policy prescription to attract higher FDI requires focussing on ensuring better institutional quality with a lower level of corruption along with raising the skill-base of the labour force in an outward looking external trade regime.

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Notes

  1. 1.

    Number of countries depends on the independent variables included in the model and data availability.

  2. 2.

    OLS is optimal if the error process has some variance (heteroscedasticity).Moreover, for a multiple country panel data analysis OLS ignores the country effects (Baltagi and Griffin 1997). More seriously, if the errors are not spherical, there is no guarantee that the OLS standard errors will be correct and the estimated coefficients may be incorrect sign. FE model is a much better estimation procedure and overcome most of the problems arise from OLS. Moreover, in a panel data analysis with country FE approach allows us to distinguish more systematically between the effects of the policy changes over time as well as across countries (Busse and Hefeker 2007). For OLS to be properly applied, the errors have to be independent and homoskedastic. Those conditions are so rare that is often unrealistic to expect that OLS will suffice for such models (Davidson and McKinnon 1993).

  3. 3.

    Number of countries depends on the independent variables included in the model and data availability.

  4. 4.

    Please see the definition and variable construction in page 9.

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Authors and Affiliations

  1. School of Business, Western Sydney University, Locked Bag 1797, Penrith South DC, NSW, 1797, Australia

    Girijasankar Mallik

  2. School of Business, Western Sydney University, Penrith, Australia

    Mamta Chowdhury

Authors
  1. Girijasankar Mallik
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  2. Mamta Chowdhury
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Correspondence to Girijasankar Mallik .

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Editors and Affiliations

  1. Department of Economics, North-Eastern Hill University, Shillong, Megalaya, India

    Utpal Kumar De

  2. Economic Research Unit, Indian Statistical Institute, Kolkata, West Bengal, India

    Manoranjan Pal

  3. Biological Anthropology Unit, Indian Statistical Institute, Kolkata, West Bengal, India

    Premananda Bharati

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Mallik, G., Chowdhury, M. (2017). Does Institutional Quality Affect Foreign Direct Investment? A Panel Data Analysis. In: De, U., Pal, M., Bharati, P. (eds) Inequality, Poverty and Development in India. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-6274-2_2

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  • DOI: https://doi.org/10.1007/978-981-10-6274-2_2

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