THE ROLE OF GOVERNANCE ON INWARD FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES

Abstract

Developing countries generally have poor governance infrastructure negatively affecting investment climate. Since economic growth of host countries is another important factor affecting the foreign direct investment decisions, the aim of the paper is to analyze the effect of governance infrastructure and economic growth with other control variables on FDI inflows in developing countries and to discuss policy implications to increase their FDI inflows. Since governance, FDI and growth are three concepts that interact with each other according to the theoretical and empirical literature, System GMM methodology is used to deal with endogeneity problem. It is found that improvements in governance and higher GDP growth rate attract more FDI inflows in developing countries.