A Panel Study on the Institutional Quality-Foreign Direct Investment Link
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Studies examining the factors that affect foreign direct investment (FDI) in developing countries have predominantly focused on traditional determinants and have often overlooked institutional quality. This study examines the relationship between institutional quality and FDI using annual data for 15 developing countries from 2002 to 2023 in a balanced panel framework. In addition to institutional quality, the FDI model includes non-renewable energy consumption, fixed capital, and financial development as explanatory variables. The analysis uses the CADF unit root test, the Pedroni and Westerlund cointegration tests, the AMG and CCE-MG estimators, and the Dumitrescu-Hurlin causality test. The results indicate cointegration among the variables and confirm a heterogeneous panel structure. The long-run estimates show that institutional quality, non-renewable energy consumption, fixed capital, and financial development increase FDI. The causality findings further indicate unidirectional causality from each explanatory variable to FDI. These findings provide policy implications for developing countries seeking to attract foreign investment through improvements in institutional quality, capital accumulation, energy-sector capacity, and financial development.
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