Foreign Direct Investments and Institutional Quality: a Panel Analysis of Non-OECD Countries

Abstract: Foreign Direct Investments (FDI) have been increasing as a share of world GDP during the last decades and constitutes 40 percent of the external development nance to developing and transition economies. This study aims to contribute to the understanding of the allocation of FDI across countries; why some countries see high levels of in ow and others see less. A panel of non-OECD countries from 1996 to 2014 is studied in order to investigate the relationship between FDI levels and several aspects of institutional quality. Previous literature and theory suggests that low institutional quality could be a impediment for FDI in ow. The results in this study support this view and nd a positive association between FDI in ow per capita and institutional quality. Furthermore, institutional quality seems to have a persistent e ect on the FDI in ows. In support of recent literature on the Lucas Paradox, investors seems to take more aspects of institutional quality into account when investing in poor countries.