Econometric Modeling of Foreign Direct Investment Inflows to Developing Countries

Abstract:

The purpose of this work is to assess the impact of the effectiveness of the country’s institutions on the foreign direct investment inflows to developing countries using econometric modeling. The authors put forward a hypothesis about the positive impact of institutional factors. We have assessed the influence of institutions using the multiplication of the index of economic freedom and the state fragility index, as these indices most fully characterize disjoint groups of institutions. To achieve the main goal of the study, we have conducted the econometric modeling based on data from the World Bank, the Heritage Foundation and the Fund for Peace from 1995 to 2015. As the main tool of econometric analysis, a panel regression with fixed effects is used. We also apply the technique of a two-step least-squares method with instrumental variables to solve a possible problem of endogeneity in the model. As a result of the study, the authors have assessed the impact of institutional factors, as a whole, through multiplication of indices. We have confirmed the hypothesis about the positive impact of institutional factors on the inflow of foreign direct investment to developing countries, as well as to the countries with less developed institutions.