Significance of Good Governance for FDI Inflows in SAARC Countries

Abstract

This paper studies the importance of good governance for FDI inflows in SAARC member countries for the time period of nine years, i.e. from 2006 to 2014. The worldwide governance indicators of Kaufmann, Kraay, and Zoido-Lobaton (1999) are used to investigate the impact of good governance on FDI inflows. Through random effects panel estimation technique, the results show that political stability and regulatory quality significantly and positively affect inward FDI. On the contrary, prevalence of corruption discourages multinationals to invest in SAARC countries. Moreover, conventional FDI location determinants like market size and development level continue to exert their positive influence. However, openness of the host economy and human capital, though equally important, are insignificant in terms of their possible sway on FDI inflows. The key finding is that good governance has significant impact on inward FDI in the SAARC region.