Institutional Governance and Foreign Direct Investments: Evidence from South Asian Emerging Markets

Abstract

The current study investigated the effect of institutional governance on foreign direct investment inflows in five South Asian emerging countries for the period of 1996-2017. The results of the Housman's specification test support the fixed effects model could better fit the data. The estimated results showed that a governance variable such as control of corruption has positive and significant whereas, political stability, regulatory quality, and voice and accountability have a negative and significant impact on foreign direct investments. Moreover, the results of the market size have significant negative, whereas, level of development and trade openness is found to have a significant and positive effect on foreign direct investments. These results have important policy implications for South Asian emerging countries. The results suggest that countries should improve the quality of their business and institutional environment that would create an attraction for foreign investors.