The Quality of Institutions and Foreign Direct Investment

28 Pages Posted: 22 Oct 2007

See all articles by Christian Daude

Christian Daude

Inter-American Development Bank (IADB)

Ernesto Stein

Inter-American Development Bank (IDB)

Abstract

Using bilateral foreign direct investment (FDI) stocks around the world, we explore the importance of a wide range of institutional variables as determinants of the location of FDI. While we find that better institutions have overall a positive and economically significant effect on FDI, some institutional aspects matter more than others do. Especially, the unpredictability of laws, regulations and policies, excessive regulatory burden, government instability and lack of commitment play a major role in deterring FDI. For example, the effect of a one standard deviation improvement in the regulatory quality of the host country increases FDI by a factor of around 2. These results are robust to different specifications, estimation methods, and institutional variables. We also present evidence on the significance of institutions as a determinant of FDI over time.

Suggested Citation

Daude, Christian and Stein, Ernesto Hugo, The Quality of Institutions and Foreign Direct Investment. Economics & Politics, Vol. 19, No. 3, pp. 317-344, November 2007, Available at SSRN: https://ssrn.com/abstract=1022737 or http://dx.doi.org/10.1111/j.1468-0343.2007.00318.x

Christian Daude (Contact Author)

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Ernesto Hugo Stein

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States

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