International Journal of Business and Economics Volume 22, No. 3 December, 2023

The Duration and Robustness of Institutional Quality and Foreign Direct Investment in World Economies

Tarek Eldomiaty

The American University in Cairo

Jasmine Fouad

The American University in Cairo

Nouran Tarek Ezzeldin

Central Bank of Egypt

Nadine Fakhry Farouk Mohamed

Arab Academy for Science, Technology & Maritime Transport

Ahmed Fikri Mabrouk

Misr International University

Abstract

This paper aims to quantify the effects of institutional change on net flows of foreign direct investment across a panel of 91 countries over the period 2002-2022. The paper contributes to the current literature in two ways. First, the paper considers the duration of institutional quality which is a new factor that carries significant implications to public policy in terms of the sustainability of comparative institutional arrangements across different economies. Second, the duration of institutional quality offers quantitative representation about the right time for FDI to enter/exist a host country. The results show that (a) three out of six institutional indicators have significant effect on net flows of FDI as a percentage of GDP, (b) political stability has a robust negative effect on absolute magnitude of FDI which indicates that foreign investments may find weak government governance an investment opportunity shall the government offer generous investment incentives which are usually reflected in high country risk premium, (c) the results are mainly significant to four regions namely, Europe & Baltics, Middle East and North Africa, East Asia and Pacific and South Asia, (d) institutional changes take on average between 16 to 17 years for an improvement in institutional indicators to have an effect on net flows of FDI as percentage of GDP.

Keywords：Worldwide Governance Indicators, Duration of Institutional Quality, absolute magnitude of FDI, World Economies, Robustness

JEL Classifications：C23, D02, F21, G18, O43

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