The impact of governance variables in attracting foreign direct investment inflows

Abstract

It is widely thought that the quality of a country's institutions impacts its economic performance. The current study analyses six governance variables to assess their importance in attracting foreign direct investment (FDI) net inflows into different countries. This paper presents evidence that voice and accountability political stability and violence, rule of law, and openness to trade are important factors in attracting foreign direct investment. The coefficient for voice and accountability is positive and statistically significant, indicating that greater accountability and citizen participation are associated with higher levels of foreign investment. The coefficient for political stability and violence is positive and marginally significant, suggesting that more stable and peaceful countries may be more attractive to foreign investors. The coefficient for government effectiveness is found to be positive but not statistically significant, indicating that the effectiveness of government may not have a direct impact on foreign direct investment and this is the same case with the control of corruption.