Effect of Governance Infrastructure on Foreign Direct Investment.

Abstract

eveloping countries during 2007 to 2015. 78 developing and 36 developed countries are considered depending on the data constraint. Considering the persistence behavior of FDI inflows a dynamic panel model is developed in this regard. Two-Step System-GMM estimator is used as the estimation technique as it provides most consistent estimates for dynamic models. Findings indicate that the lagged dependent variable of FDI is positively significant irrespective of development levels of the countries and the proxies used for the governance indices. Further, governance infrastructure in developed countries are found FDI encouraging, while it is in the developing countries FDI hindering. This suggests that developing countries need to place greater emphasis on reducing political instability by improving governance standards in order to prevent capital flight and encourage capital inflows.