Does Improved Governance Lead to a Higher Share of FDI in Foreign Equity Investments?

Abstract

AbstractWe investigate the relationship between a country's share of FDI in its foreign equity investments (FDI plus foreign portfolio investment (FPI)) and its governance quality relative to that of the investor's country. Poorly governed countries are often advised to improve their governance structures to attract FDI. Contrary to this prescription, we find that as the governance quality of poor‐governance host countries improves, FDI share of foreign equity investments declines, because of a relatively higher increase in FPI than FDI. Only after a sustained and meaningful improvement in governance quality, do low‐quality host countries reap the benefits of attracting greater FDI from investors in high‐quality countries.