Crisis to Crisis: FDI Redux

Abstract:     
In this paper, we examine the impact of institutional quality on foreign direct investment (FDI) and on the volatility of FDI. By utilizing data in a post Asian financial crisis context, we can examine whether the crisis has an immediate impact on retarding FDI. Based on our analysis of panel data of 164 countries from 1996-2006, our results lead us to believe that good institutional quality matters to FDI. We provide evidence that institutional quality has a positive and significant effect on FDI, but a negative and significant effect on FDI volatility. More specifically, we find that a one standard deviation change in institutional quality improves FDI by a factor of 1.69.

Number of Pages in PDF File: 33

Keywords: FDI, institutional quality, governance, financial crisis

JEL Classification: F30, F21, G15

working papers series