Judicial institutions of property rights protection and foreign direct investment inflows

Abstract

Despite a growing consensus that host country institutions affect the spatial distribution of foreign direct investment, there is a debate about which institutions drive this relationship. This study contributes to this debate by examining the relationship between foreign direct investment net inflows and three judicial institutions of property rights protection: judicial contract enforcement, judicial independence, and judicial impartiality. I evaluate this relationship by applying the system-GMM estimation approach to a sample of 150 countries covering the period 2000–16. I find robust evidence of positive relationships between FDI net inflows and both judicial independence and judicial impartiality. On the other hand, judicial contract enforcement appears to be weakly related to FDI net inflows. The results are robust to alternative specifications and estimation methods, including the instrumental variables approach. While the findings of this study reinforce the notion that host country institutions matter for foreign direct investment, they, more importantly, underscore the merits of unbundling institutions to understand their impact on multinational firm activity.