Institutional determinants of bilateral foreign direct investment flows

The paper analyses the influence of institutional development level on bilateral foreign direct investment (FDI) flows. The theory suggests that more developed institutions in both home and host countries should increase FDI flows between countries. At the same time existing empirical research often have controversial results.

We use database on bilateral FDI flows for 67 recipient countries and 109 home countries covering the years of 2001–2016, covering about 80 % of FDI flows of the period. The following indices of institutional development are considered: voting right, political stability, government efficiency, regulation quality, rule of law and corruption control. Using principal component analysis, we construct an aggregate index of institutional development for each country.

In contrast to many related research we consider the endogeneity problem to get the unbiased estimates. Using Poisson pseudo maximum likelihood method with instrumental variables (IV PPML) and in opposition to many empirical research we do not find support to the positive influence of countries’ institutional development on FDI flows. Significant positive influence of institutional development on foreign direct investment was found only for the case when the level of institutional development of the host country exceeds that of recipient country. Additionally, we do not find proof for the hypothesis that increase in institutional distance between countries lead to FDI shrinking.

Keywords

FDI gravity model, FDI determinants, institutional determinants of FDI, Poisson pseudo maximum method with instrumental variables, IV PPML, principal component analysis

Acknowledgment

President of Russia grant "Institutional determinants of foreign direct investment inflows: country and region level analysis" (grant No. MD 6402.2018.6).

Received

19.12.2019

Publication date

29.03.2021

Number of characters

52832

Cite

GOST	Drapkin I., Chukavina K., Groznykh R. Institutional determinants of bilateral foreign direct investment flows // Ekonomika i matematicheskie metody – 2021. – V. 57. – Issue 1 C. 33-42 [Electronic resource]. URL: https://emm.jes.su/S042473880007982-9-1 (circulation date: 19.04.2024). DOI: 10.31857/S042473880007982-9
MLA	Drapkin, Igor, Chukavina, Kristina, Groznykh, Rogneda "Institutional determinants of bilateral foreign direct investment flows." Ekonomika i matematicheskie metody 57.1 (2021):33-42. DOI: 10.31857/S042473880007982-9
APA	Drapkin I., Chukavina K., Groznykh R. (2021). Institutional determinants of bilateral foreign direct investment flows. Ekonomika i matematicheskie metody 57(1), pp.33-42 DOI: 10.31857/S042473880007982-9

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