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Foreign direct investment and institutional quality: empirical evidence from South America

Foreign direct investment and institutional quality: empirical evidence from South America The purpose of this paper is to investigate the effect of institutional quality on foreign direct investment (FDI) flows in South America.Design/methodology/approachThe study uses two-stage least squares (2SLS) and fixed effect ordinary least squares regression analyses to examine the relationship between institutional quality and FDI in South America.FindingsThe study finds a significant positive relationship between institutional quality index and FDI. This implies that improvements in the institutional quality relate to increases in the flow of FDI to South America. Domestic capital, GDP per capita growth, and trade positively relate to FDI. However, the coefficient of trade is not significant. This implies that increases in these variables relate to increases in FDI flows to South America.Practical implicationsThe study recommends that quality of institutions matter to the flow of FDI and therefore, efficient institutional reforms should be a priority for policymakers as this creates a conducive investment environment to attract FDI in South America. Further, policies that are focused on promoting competition, open market, and effective non-corrupt public institution as well as open and transparent legal and regulatory regimes, and effective delivery of government services should be the priority of policymakers in South America (Mishra and Daly, 2007).Originality/valueThe study uses a single measure of institutional quality based on a broad set of institutional indicators. This broad measure of institutional quality differs from the available studies that mainly focused on single aspects of institutional quality, that is, either corruption, governance, or political risk. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic and Administrative Sciences Emerald Publishing

Foreign direct investment and institutional quality: empirical evidence from South America

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1026-4116
DOI
10.1108/jeas-03-2018-0034
Publisher site
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Abstract

The purpose of this paper is to investigate the effect of institutional quality on foreign direct investment (FDI) flows in South America.Design/methodology/approachThe study uses two-stage least squares (2SLS) and fixed effect ordinary least squares regression analyses to examine the relationship between institutional quality and FDI in South America.FindingsThe study finds a significant positive relationship between institutional quality index and FDI. This implies that improvements in the institutional quality relate to increases in the flow of FDI to South America. Domestic capital, GDP per capita growth, and trade positively relate to FDI. However, the coefficient of trade is not significant. This implies that increases in these variables relate to increases in FDI flows to South America.Practical implicationsThe study recommends that quality of institutions matter to the flow of FDI and therefore, efficient institutional reforms should be a priority for policymakers as this creates a conducive investment environment to attract FDI in South America. Further, policies that are focused on promoting competition, open market, and effective non-corrupt public institution as well as open and transparent legal and regulatory regimes, and effective delivery of government services should be the priority of policymakers in South America (Mishra and Daly, 2007).Originality/valueThe study uses a single measure of institutional quality based on a broad set of institutional indicators. This broad measure of institutional quality differs from the available studies that mainly focused on single aspects of institutional quality, that is, either corruption, governance, or political risk.

Journal

Journal of Economic and Administrative Sciences – Emerald Publishing

Published: May 16, 2019

Keywords: South America; Foreign direct investment; Institutional quality; 2SLS technique; F21; C22; O17

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