Governance and Foreign Direct Investments : A panel gravity approach on emerging markets

Abstract: It is widely argued that a country’s economic performance is determined by its institutional quality. This study utilizes six governance indicators to examine what role they play in attracting foreign direct investments (FDI) net inflows into emerging markets. Using a static and dynamic panel gravity model, a data set of 26 host countries are investigated during the time period of 2002– 2019 with the aim of identifying which institutional factors are the main drivers of FDI into emerging markets. This paper provides evidence that Voice and Accountability, Political stability and absence of violence, Regulation quality and Control of corruption have a statistically significant positive effect of FDI. Government effectiveness and Rule of law were found to be significantly negative linked to FDI. In addition to that, this study examines further macroeconomic determinates that were likely to have an impact on FDI. It was found that trade openness, developed infrastructure as well as the sum of natural resources rents as a percentage of GDP created a desirable business conditions for multinational corporations to invest in. Lastly it was noted that source countries preferred to invest in wealthier nations. These results create good basis for understanding that it requires policymakers to improve and implement sound laws and regulations as well as a stable business environment in order to attract FDI into emerging markets.