Which factor dominates FDI : institutional or economic?

This study investigates the relationship between foreign direct investment and the institutional quality factors for 156 developed and developing countries using cross section panel data. The findings of the study suggest that while corruption decreases FDI significantly, on the other hand, democracy, law and order, government stability along with major economic factors have significant positive effects on FDI inflows. Ordinary Least Square (OLS) estimations of the study are further substantiated by panel Fixed Effect (FE) method and the result of the study suggest that the effect of institutional qualities is much larger than the economic and policy variables in majority of the cases. Thus, the policy prescription to attract higher FDI requires to be focussed on ensuring higher institutional supports with lower level of corruption along with raising the skill base of the labour force in an outward looking external trade regime.