Foreign Direct Investment, Institutional Quality and Economic Growth

Hayat, Arshad (2019): Foreign Direct Investment, Institutional Quality and Economic Growth. Published in: The Journal of International Trade and Economic Development No. 1/2019 (2 January 2019): pp. 1-20.

Abstract

Institutional quality is considered to be an important factor in boosting the economic growth of a country. This paper explores the role of institutional quality in economic growth and more specifically the role it plays via the channel of foreign direct investments. This paper uses a larger dataset of 104 countries and applies GMM estimation method to a dynamic panel data to evaluate the direct impact of institutional quality on economic growth and the indirect impact of institutional quality on economic growth through enhancing the FDI-induced economic growth. This paper provides evidence that both FDI inflows and institutional quality cause stronger economic growth. The FDI-led growth, however, was only experienced in the low and middle-income countries. In these countries, better institutional quality was also found to be enhancing the FDI-led economic growth. An important finding of this paper is that in the high-income countries, FDI was found to slow down the economic growth. The results are robust and consistent for individual institutional quality indicators and controlling for endogeneity.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign Direct Investment, Institutional Quality, Economic Growth, GMM
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E14 - Austrian ; Evolutionary ; Institutional; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

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