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Good institutions, more FDI? Evidence from Indian firm-level data

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Abstract

The study examines the effect of institutional quality on the FDI of Indian firms at the intensive country margin. In the present study, the state judiciary system, bureaucracy system, and property-right protection are taken to represent the institutional quality of the host country. The study focuses on examining the effect of institutional quality on FDI controlling for the heterogeneity at the firm level. The results show that institutional quality does have a significant effect on FDI at the intensive country margin. The result suggests that, ceteris paribus, the increase in institutional quality leads to an average increase [exp(0.498)-1]*100 = 60.5% in FDI from Indian firms. The results reveal that FDI from large firms is positively associated with the institutional quality of the host country. The results also reveal that the institutional quality of developed regions is positively associated with FDI. However, there is a negative association between the institutional quality of the developing region and FDI. The firms usually prefer to invest in institutionally sound developed countries (self-selection). To address the source of endogeneity the ‘selection effect’ is explicitly controlled by using a two-stage average treatment effect (ATE). The result is consistent with the initial findings.

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Notes

  1. See UNCTAD Handbook on statistics 2018. Available on www.unctad.org. All figures are in current prices and exchange rate.

  2. Previous studies such as Nunnenkemp et al. (2012); Takagi and Shi (2011) have taken GDP per capita income (GDPC) as an alternative proxy of labour cost. GDPC moves positively with the purchasing power and real wage cost.

  3. See Kedia et al. (2012) for review. Multinational from the emerging economies which are required to be competent to meet the need of global consumers look to FDI to link and leverage partnership with the firms to gain knowledge when establish producers are reluctant to sell and licence their technologies for fear of reverse engineering or the technology required experimental learning to get full utilization of the application.

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Acknowledgements

I thank the anonymous referees for their valuable suggestions.

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  1. Department of Economics, Royal Global University, Betkuchi, Guwahati-35, Assam, Pin: 781035, India

    Munmi Saikia

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Table 11 Industry-wise division of sample firms
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Saikia, M. Good institutions, more FDI? Evidence from Indian firm-level data. Int Econ Econ Policy 19, 411–436 (2022). https://doi.org/10.1007/s10368-021-00523-4

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