Institutional Quality and Foreign Direct Investment in India

Foreign direct investments tend to gravitate to nations with good governance. The quality of governance is largely affected by institutional factors such as control of corruption, government effectiveness, political stability, regulatory quality, rule of law, voice and accountability. This study contributes to the existing literature on foreign direct investments by testing the impact of six parameters of institutional quality on investment inflows into India.

Foreign direct investment (FDI) is an important driver of economic growth as evident from the empirical studies conducted across the world. The magnitude of the impact of FDI on growth may differ depending upon the different country classifications such as developed, developing or least developed countries. Some studies even find insignificant or negative relations between the two. However, the fact remains that over the last five decades, FDI has pole positioned itself as an important factor of economic recovery and growth on the world stage. Institutions are man-made structures, which restrain human behaviour within well-defined rules and laid-out norms.

The quality of local institutions in the recipient economy is considered to be an important factor for inward FDI. These institutions are primarily government, semi-government or autonomous bodies/forums, etc. The formal institutions have a well-defined character based on laws and rules in comparison to the informal institutions, which derive their power based on social norms or conventions.