Institutional Clusters and FDI Flows to the MENA Region

The empirical literature on the institutions-FDI nexus has treated the influence of institutions individually despite the proven high correlation among them. This is a conceptual shortcoming. To overcome this limitation, we cluster institutions using Principal Component Analysis (PCA). We apply PCA to ICRG institutions for 17 MENA countries during the period 1984-2011. Three institutional clusters have been extracted: stability and order, quality of public administration, and presence of democratic systems. Using Prais-Winston regressions, our estimates show that the presence of a democratic system has a positive influence on FDI flows, while the quality of public administration has a surprisingly negative influence