Abstract
The aim of this paper is assessing the impact of the effectiveness of the country's institutions on the foreign direct investment inflows in developing countries with the use of econometric modeling. We put forward a hypothesis about the positive impact of institutional factors on the foreign direct investment inflow. The overall influence of institutions is evaluated using the multiplication of the index of economic freedom and the state fragility index, as two indices, most fully characterizing the disjoint groups of the institutions. To achieve the main goal of the study, we accomplish the econometric modeling based on data from the World Bank, the Heritage Foundation and the Fund for Peace from 1995 to 2015. As the main tool of econometric analysis, a panel regression with fixed effects is used and the technique of a two-step least-squares regression analysis method with instrumental variables is used to solve a possible endogeneity problem in the model. As a result of the study, an assessment of the overall impact of institutional factors through the composition of indices was carried out and a hypothesis about the positive impact of institutional factors on the inflow of foreign direct investment in developing countries was confirmed.
Highlights
Under current conditions, the emerging political and economic shocks dictate the need to develop measures to preserve and improve the country's investment climate
For developing countries, which are in most cases recipients of foreign direct investment, it is important to identify factors of foreign direct investment inflows, which in turn are recognized as a catalyst for economic growth
In this paper authors discuss the possibility to estimate the impact of the effectiveness of the country's institutions on the foreign direct investment inflows in developing countries using the multiplication of two institute indexes and the results of estimation by econometric modeling
Summary
The emerging political and economic shocks dictate the need to develop measures to preserve and improve the country's investment climate. In this paper authors discuss the possibility to estimate the impact of the effectiveness of the country's institutions on the foreign direct investment inflows in developing countries using the multiplication of two institute indexes and the results of estimation by econometric modeling.
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