Foreign Investment and Institutional Arrangements

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Foreign Direct Investment (FDI) is increasingly pivotal for policymakers and investors, significantly influencing economies through capital inflows, production methods, and wealth distribution. Institutional arrangements are crucial for attracting FDI, with the political environment playing a key role. Recent studies suggest that enhancing institutional quality positively impacts FDI attraction, yet research linking FDI to institutional constraints remains limited due to data availability. This study reviews theories on FDI determinants, exploring traditional and institutional factors. It identifies variables associated with institutional quality to evaluate their impact on FDI through panel econometric analysis. The dependent variable is the net flow of FDI as a percentage of Gross Domestic Product (GDP), with two institutional variables-"political environment" and "political stability"-analyzed separately due to strong correlations. Using data from 123 countries (2011-2015), the study applies panel data models, including Fixed Effects and Two-stage Least Squares with instrumental variables. Results confirm that institutional quality positively influences FDI attraction.