Country governance and FDI attractiveness : evidence from SAARC and G8 countries

Abstract

The main purpose of this study is to check the impact of country governance indicators (independent variables) and infrastructure index (control variable) on foreign direct investment in SAARC and G-8 economic communities using the governance indicator introduced by (Kaufmann,et al,1999,2010). Since the evolvement of the governance issues in current century, it is worthwhile to comprehend the impact of those governance indicators on the FDI inflow and outflow of economy. This empirical investigation concentrated on the impact of six governance indicators on inflow of foreign direct investment (FDI) in G8 (Group of Eight) and SAARC (South Asian Association for Regional Cooperation) countries. Data is collected over the period of 2000 to 2015 from World Bank website (World Development Indicator) and the site of World Governance Matters. I have used panel data to examine the impact of above mentioned independent and control variable on dependent variable. E-views-9 predictive modeling software is used to estimate the result. The method that is being employed for estimation is the Multiple Linear Regression, further I have applied the fixed effect model after applying the Hausman test to check whether to go for random or fixed effect model. After that separate regression model for SAARC and G8 countries estimated and analysed. The result indicates that in case of SAARC countries Political stability and absence of violence, government effectiveness, corruption and bureaucratic red tape and infrastructure index (control variable) have significant impact on FDI inflow at 5% level of significance. This thing indicates that foreign investors look at the political condition of the host country, the effectiveness of the government there, the laws against the corruption and lastly the infrastructure of the host country in the case of SAARC countries when taking decision about the investment. After that I have applied the same methodology for the G-8 countries but the results are different in this case. Only the Political stability & absence of violence and, voice and accountability have significant impact on FDI inflow at 5% level of significance. This thing indicates that, whenever an investors think about to invest in Group eight countries, they must look into voice and accountability and, Political stability factor of any host economy of G-8 economic community.