The impact of institutional advancement in attracting foreign direct investment in developing economies

Abstract

This study examined the impact of in attracting Foreign Direct Investment (FDI) in developing economies. ‘Institutional Advancement ‘is defined as the degree to which a host country's institutional environment matches the standards well-established in developed market economies. The World Governance Indicators developed by the World Bank were used as a measure to determine Institutional Advancement. The developing and developed economies were compared to determine whether Institutional Advancement had the same effect in attracting FDI in different economies. An additional variable, the Gross Domestic Product (GDP) was introduced to investigate whether the state of the economy in each of the economy types also impacted on inward FDI. Data was collected from 2000 to 2009, however the analysis was done from 2002 due to the absence of a report on the World Governance Indicators in 2001. The results show that the World Governance Indicators did not present significant evidence that they impacted in attracting FDI in developing economies. GDP appeared to be a better predictor of FDI inflows than the World Governance Indicators in developing economies.