Description
Title: Analysis of Foreign Investment and Institutional Strength in Emerging Markets
Abstract: In a sample of 12 emerging market economies from 2007 to 2017, this study examines the causal and cointegrating relationships between foreign direct investment (FDI), foreign portfolio investment (FPI), and institutional quality. Using the Principal Components Analysis (PCA) technique, a composite institutional quality index composed of the Worldwide Governance Indicators was created. The cointegrating and causal relationships between the important variables were evaluated using the panel autoregressive distributed lag (ARDL) model and the error correction model (ECM). The results confirmed long-term unidirectional causality from FDI and FPI to institutional quality in addition to finding significant cointegrating relationships between institutional quality and foreign capital inflows (FDI and FPI). The findings also suggested that the two foreign capital inflows had a longer-term relationship that was more of a trade-off, reliant on the dynamics of the institutional environment in the host economy. One of the suggested solutions is for emerging markets to keep their economies open in order to attract capital inflows, which will strengthen their domestic institutional framework in turn. Institutional improvements could reduce institutional weaknesses’ persistence, protect emerging economies from the negative effects of erratic capital flows, and, in the long run, increase capital inflows.
Keywords: international capital inflows; foreign direct investment; foreign portfolio investment; institutional quality; emerging markets
Paper Quality: SCOPUS / Web of Science Level Research Paper
Subject: Economics
Writer Experience: 20+ Years
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