- Apply for Authority
- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
Threshold Values of Institutional Quality on FDI Inflows: Evidence from Developing Economies
- Downloaded
- Viewed
Abstract
Purpose: This study estimates the threshold values of institutional quality through investigating the non-linear effect of six sub-indices of Worldwide Governance Indicators on FDI inflows in 34 developing countries in Asia and Eastern Europe over the period from 2000- 2017. Research Design, data and methodology: GMM EGLS is employed which does not include the lagged value of the dependent variable as an independent variable. As a proxy for the institutional quality, either one of the six sub-indices of WGI from World Bank or the composite index obtained through a principal component analysis is used in a separate model. Results: An improvement in institutional quality, when the quality stays below a certain threshold level, does not increase FDI inflows, and only when the quality is above the threshold, it can positively influence FDI inflows. The threshold values of political stability and absence of violence, government effectiveness, and rule of law are relatively higher than those of the other dimensions of WGI. Conclusion: Institutional quality of the developing economies of Asia and Eastern Europe has a non-linear effect on FDI inflows. The target countries need to upgrade their institutional quality above the threshold in order to attract more FDIs.
- keywords
- Developing Countries, FDI Inflows, Institutional Quality, Non-linear Effect, Threshold Values
Reference
Allison, P. (2012). When can you safely ignore multicollinearity. Statistical Horizons, 5(1) Retrieved January 15. 2021 from https://statisticalhorizons.com/multicollinearity.
Almodovar, P. & Rugman, A. M. (2014). The M curve and the performance of Spanish international new ventures. British Journal of Management, 25(S1), S6-S23. http://doi.org/10.1111/1467-8551.12022.
Aziz, O. G. (2018). Institutional quality and FDI inflows in Arab economies. Finance Research Letters, 25(C), 111-123. http://doi.org/10.1016/j.fr.2017.10.026.
Bardhan, P. (1997). Corruption and development: A review of issues. Journal of Economic Literature, 35(3), 1320-1346.
Benito-Osorio, D., Colino, A., Guerras-Martin, I. A. & Zungiga-Vincente, J. A. (2016). The international diversificationperformance link in Spain: Dose firm size really matter?. International Business Review, 25(2), 548-558. http://doi.org/10.1016/j.ibusrev.2015.09.004.
Boudreaux, C. J. & Holcombe, R. G. (2018). Is institutional improvement possible?. Applied Economics Letters, 25(11), 758-761. http://doi.org/10.1080/13504851.2017.1363856.
Buchanan, B.G. Le, Q. V. & Rishi, M. (2012). Foreign direct investment and institutional quality: Some empirical evidence. International Review of Finance Analysis, 21(C), 81-89. http://doi.org/10.1016/j.irfa.2011.10.001.
Chinn, M. D. and H. Ito (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81(1), 163-192. http://doi.org/10.1016/j-jdeveco.2005.05.010.
Craigwell, R. & Wright, A. (2011). Foreign direct investment and corruption in developing economies: Evidence from linear and non-linear panel granger causality tests. Economic Bulletin, 31(3), 2272-2283.
Clapham, C. & Nicholson, J. (2013). The concise Oxford dictionary of mathematics (4th ed.). Oxford, U.K.: Oxford University Press.
Danaubauer, J. & Dreger, C. (2016). The end of cheap labour: Are foreign investors leaving China. Discussion Paper No. 10097, Bonn, Germany: The Institute of the Study of Labor
Daniele, V. & Marani, U. (2006). Do institutions matter for FDI? A comparative analysis for the MENA countries. MPRA Paper No. 2426, Catanzaro: Italy: Magna Græcia University.
Dorozynski, T., Dobrowolska, B. & Kuna-Marszatek, A (2020). Institutional quality in Central and East European countries and its impact on FDI inflow. Entrepreneurial Business and Economic Review, 8(1), 91-110. http://doi.org/10.15678/EBER.2020.080105.
Dunning, J. H. (2001). The eclectic (OLI) paradigm of international production: Past, present and future. International Journal of Economics of Business, 8(2), 173-190. http://doi.org/10.1080/13571510110051441.
Dunning, J. H. (1998). Location and multinational enterprises: A neglected factor. Journal of International Business Studies, 29(1), 45-66.
Dunning, J. H. (1993). Multinational enterprises and the global economy. Boston, U.S.A.: Addison-Wesley.
Feulefack, L. K. & Ngassam, B. S. (2020). Natural resources, quality of institutions and foreign direct investment in Africa. Economics Bulletin, 40(1), 148-162.
Ghazalian, P. L. & Amponsem, F. (2019). The effects of economic freedom on FDI inflows: An empirical analysis. Applied Economics, 51(11), 1111-1132. http://doi.org/10.1080/1080/00036846.2018.1524979.
Globerman, S. & Shapiro, D. (2002). Global foreign direct investment flows: The role of governance infrastructure. World Development, 30(11), 1898–1919. http://doi.org/10.1016/S0305-750X(02) 00110-9.
Harding, T. & Javorcik, B. (2011). Roll out the red carpet and they will come: Investment promotion and FDI inflows. Economic Journal, 121(557), 1445-1476. http://doi.org/10.1111/j.1468-0297. 2011.02454.x.
Ibrahim, M., Adam, I. O. & Sare, Y. A. (2019). Networking for foreign direct investment in Africa: How important are ICT environment and financial sector development?. Journal of Economic Integration, 34(2), 346-369. http://doi.org/10.11130/jei.2019.34.2.346.
Islam, M. Khan, M. A., Popp, J., Sroka, W. & Olah, J. (2020). Financial development and foreign direct investment – The moderating role of quality institutions. Sustainability, 12(9), 3356. http://doi.org/10.3390/su12093556.
Kang, Y. (2018). Regulatory institutions, natural resource endowment and location choice of emerging-market FDI: A dynamic panel data analysis. Journal of Multinational Financial Management, 45(C), 1-14. http://doi.org/10.1016/j.mulfin.2018.04.003.
Kaufmann, D., Kraay, A. & Mastruzzi, M. (2010). The worldwide governance indicators methodology and analytical issues. Policy Research Working Paper, No. 5430, Washington, DC:World Bank.
Kaulihowa, T. & Adjasi, C. (2019). Non-linearity of FDI and capital development in Africa. Transnational Corporation Review, 11(2), 133-142. http://doi.org/10.10180/19186444.2019.1635734.
Kolstad, I. & Wang, A. (2012). What determines Chinese outward FDI. Journal of World Business, 47(1), 26-34. http://doi.org/10.1016/j-jwb.2010.10.017.
Kostevc, Č., Redek, T. & Sušjan, A. (2007). Foreign direct investment and institutional environment in transition economies. Transition Studies Review, 14(1), 40-54. http://doi.org/10.1007/s11300-007-0140-5.
Kostova, T. & Hult, G. T. M. (2016). Meyer and Peng’s 2005 article as a foundation for an expanded and refined international business research agenda: Context, organizations, and theories. Journal of International Business Studies, 47(1), 23-32. http://doi.org/10.1057/jibs.2015.39.
Kurul, Z. (2017). Nonlinear relationship between institutional factors and FDI flows: Dynamic threshold analysis. International Review of Economics and Finance, 48(C), 148-160. http://doi.org/10.1016/j.iref.2016.12.002.
Kurul, Z. & Yalta, A. Y. (2017). Relationship between institutional factors and FDI inflows in developing countries: New evidence from dynamic panel estimation. Economies, 5(2), 1-10. http://doi.org/10.3390/economies5020017.
Landes, D. S. (1998). The wealth and poverty of nations: Why some are so rich and some are so poor. New York: Norton & Company.
Lee, S., Park, S. W. & Namgung, D. (2019). Internationalization and performance of SMEs in Masan free trade zone (Korea):The direct and moderating effects of firm size. Journal of Korea Trade, 23(4), 30-57. http://doi.org/10.35611/jkt.2019.23.4.30.
Masron, T. A. & Nor, E. (2013). FDI in ASEAN-8: Does institutional quality matter?. Applied Economics Letters, 20(2), 186-189. http://doi.org/10.1080/13504851.2012.687090.
Nondo, C., Kahsai, M. & Hailu, Y. G. (2016). Does institutional quality matter in foreign direct investment?: Evidence from Sub-Saharan African countries. African Journal of Economics and Sustainable Development, 5(1), 12-30. http://doi.org/10.1504/AJESD.2016.074441.
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86-136.
Sabir, S., Rafique, A. & Abbas, K. (2019). Institutions and FDI:Evidence from developed and developing countries. Financial Innovation, 5(1), Article No. 8. http://doi.org/10.1186/s40854-019-0123-7.
Sarker, B. & Khan, F. (2020). Nexus between foreign direct investment and economic growth in Bangladesh: An augmented autoregressive distributed lag bounds testing approach. Financial Innovation, 6(1), Article No. 10. http://doi.org/10.1186/s40854-019-0164-y.
Tintin, C. (2013). The determinants of foreign direct investment inflows in the Central and Eastern European countries: The importance of institutions. Communist and Post-Communist Studies, 46(2), 287-298. http://doi.org/10.1016/j.postcomstud. 2013.03.006.
UNCTAD (2018). World Investment Report 2018. Geneva, Switzerland: Author.
Wang, C.- H., Padmanabhan, P. & Hunag, C.- H. (2020). Does a nonlinear specification methodology better capture the link between host country corruption levels and inward foreign direct investments? A study of 92 countries. Global Business and Economic Review, 23(1), 50-78. http://doi.org/10.1504/GBER.2020.108394.
Wang, L. & Li, S. (2018). Determinants of foreign direct and indirect investments from the institutional perspective. International Journal of Emerging Markets, 13(5), 1330-1347. http://doi.org/10.1108/IJoEM-01-2018-0038.
World Bank (2018). Worldwide Governance Indicators. Washington D.C.: Author: Retrieved March 5. 2020 from https://info.worldbank.org/governanve/wgi
World Bank (2019). World Development Indicators. Washington, D.C.: Author: Retrieved March 5. 2020 from https://databank.worldbank.org/source/world-developmentindicators.
Zangina, S. & Hassan, S. (2020). Corruption and FDI inflows to Nigeria: A nonlinear ARDL approach. Journal of Financial Crime, 27(2), 635-650. http://doi.org/10.1108/JKC-09-2019-0116.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations