FDI Inflows and Host Country Institutions: Evidence from Leading Developing Economy Merchandise Exporters

Proceedings of The 5th International Conference on Applied Research in Management, Economics and Accounting

Year: 2022



FDI Inflows and Host Country Institutions: Evidence from Leading Developing Economy Merchandise Exporters

Assist. Prof. Dr. Gülşah Kulalı



Foreign direct investments (FDIs) are one of the crucial elements in the industrialization and economic growth of developing countries. These countries’ well-known problems in the areas of macroeconomy, business sector and institutional modernization are rendering them fragile to foreign investment inflows. Therefore, the question of how to sustain investment inflows is always in policymakers’ agenda in developing economies, where incentives are part of foreign economic policy, and investment climate for incoming FDI is a consideration. FDI inflows to developing economies out of global inflows fall from 52 percent to 44 percent from 2012 to 2019. In 2019, 685 of 1.540 billion of dollars’ worth of global FDI flows directed to developing economies. It was 703 of 1.351 in 2012. (World Investment Reports 2013 and 2020). These flows to developing economies are mostly export-oriented and commodity-linked investments. As one of the above-mentioned problematic areas, institutions set the context that MNEs and their foreign affiliates, as key drivers of FDI, embedded in. With weaker institutional structures, developing economies are characterized by scarcity of resources and turbulent environments where uncertainty is high, which makes them a good setting for establishing the following research question. Are foreign direct investment inflows being sensitive to changes in the quality of different institutional development aspects in leading 15 developing economy merchandise exporters? To answer this question, using country-level set of variables covering the eight-year period of 2011-2018, panel data regression estimation is made. The main motivation of this study is to contribute to institution-based view of foreign direct investments in developing economies.

keywords: Foreign Direct Investment (FDI), Institutional Development, Developing Economies, Leading Exporters, Panel Data.