Does Host Country Institutional Quality Act as a Differentiator in Intra-regional FDI? Evidence from Selected Asian Economies

AuthorShilpa Garg,Niti Bhasin
Publication Date01 May 2018
DOI10.1177/0015732517734726
SubjectArticles
Does Host Country
Institutional Quality
Act as a Differentiator
in Intra-regional FDI?
Evidence from Selected
Asian Economies
Niti Bhasin1
Shilpa Garg2
Abstract
With primary considerations such as trade and investment openness becoming
similar for many economies due to globalization, the role of other factors such as
institutional environment in promoting investment has captured increasing atten-
tion in recent times. In view of the growing importance of Asia as a prospec-
tive foreign direct investment (FDI) destination, we employ panel data regression
data for 16 Asian economies over the period 2000–2012 to study if institutional
quality affects FDI flows and stocks and whether it can act as a differentiator
while selecting a location within Asia. Among the institutional variables employed,
‘political stability and absence of violence/terrorism’ were found to be signifi-
cant determinants revealing the importance of a stable and safe political environ-
ment for FDI. However, ‘corruption’ and ‘regulatory inefficiency’ were found to
affect FDI inflows positively, indicating the preference of foreign investors for a
system where laws can be circumvented easily through corrupt bureaucracy and
where regulations are weak or less stringent.
JEL: F21, F23, O43, O53
Keywords
Asia, corruption, FDI, institutions, IPRs, political stability, regulatory quality
Foreign Trade Review
53(2) 81–97
©2018 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732517734726
http://journals.sagepub.com/home/ftr
Article
1 Associate Professor, Department of Commerce, Delhi School of Economics, University of Delhi,
Delhi, India.
2 Research Scholar, Department of Commerce, Delhi School of Economics, University of Delhi,
Delhi, India.
Corresponding author:
Niti Bhasin, Associate Professor, Department of Commerce, Delhi School of Economics, University
of Delhi, Delhi, India.
E-mail: nitisurydse@gmail.com
82 Foreign Trade Review 53(2)
Introduction
Governments in developing and emerging economies have been actively
competing for foreign direct investment (FDI) ever since the wave of globaliza-
tion and liberalization started sweeping across the world. Encouragement of
FDI is an integral part of the economic reforms process of these countries
because it is seen as an instrument of technology transfer, managerial skills,
augmentation of foreign exchange reserves and globalization of the economy
(Bhasin, 2012). Therefore, there is an ongoing competition to provide an envi-
ronment which is conducive for attracting FDI. In view of the increasing impor-
tance of FDI for developing countries, it is important to identify the determinants
of FDI for these countries.
While the understanding of the determinants of FDI has been widely researched
in literature (Armutlulu, Anıl, Canel, & Porterfield, 2011; Bhaumik, Driffield, &
Pal, 2010; Gorynia, Nowak, & Wolniak, 2010; Holtbrügge & Kreppel, 2012;
Murthy & Bhasin, 2014; Sury, 2008; Williams, 2009), there is a need to constantly
review them as it is possible that some determinants which were sufficient in the
past are now less relevant. Traditionally, some of the most important determinants
of FDI have been market size, trade openness, distance, availability of human
resources and similar macroeconomic variables (Asiedu, 2002; Loree & Guisinger,
1995; Noorbakhsh, Paloni, & Youssef, 2001). These were prime considerations
for MNCs while deciding where to invest. However, with globalization removing
barriers to trade and investment substantially, many of these considerations such
as openness and availability of human resources have become more or less equal,
and other considerations which were secondary earlier have now become impor-
tant determinants of FDI decisions. The importance of institutional factors appears
to be an important case in point. The role of institutional factors in promoting
investment and growth has captured increasing attention from a wide range of
scholars. However, a large part of this work deals with some components of insti-
tutional environment and their impact on FDI. Further, most of the related work
has been presented in the context of developed countries. The few studies for
developing countries are either based on a single country or economic groupings
such as BRICS. This article contributes to the existing literature in many ways.
First, we try to build a model which includes a broad-based concept of institu-
tional environment. Second, we have covered a large segment of the fast-growing
Asian market by including 16 countries selected on the basis of highest cumula-
tive FDI inflows.
Theoretical Framework
The understanding of institutional environment of a country and institutional
forces shaping organizational systems has a rich history. Institutional quality of
an economy is reflected through many factors such as bureaucratic procedures,
business regulation, corruption, culture, government effectiveness, language

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