Political Institutions and Foreign Direct Investment Flows into Developing Countries

The major focus of this paper is on the relationship between political, social and economic institutions and Foreign Direct Investment in developing economies. For a decade, the relationship between institutions and Foreign Direct Investment has been receiving growing attention. The link between the quality of institutions and FDI in developing countries, especially in transition economies, has led scholars to focus on the quality of institutions as determinants of FDI in developing countries. This paper explores how social economic and political institutions help explain cross-country variations in Foreign Direct Investment flows by applying Panel data regressions including 67 developing countries for the period 1984-2005. The findings suggest that better perceptions of the quality of institutions have overall a positive and economically significant effect on FDI. Especially, the unpredictability of laws, political and economic instabilities, government instability and high level of corruption play a major role in deterring FDI.