Virtuous Feedback Loops among Foreign Direct Investment Flows, Institutional Quality, and Economic Growth: An Empirical Study on the Determinants of Sustainable Development

This study examines the relationship between foreign direct investment (FDI), institutional quality, economic growth, and sustainable development using a panel dataset of 91 countries from 2000 to 2022.It employs a hybrid panel-data modelling approach, integrating correlated random effects and quasi-demeaning methods to separate within-and between-country effects, mitigate endogeneity, and capture nonlinear dynamics in the FDIgrowth-sustainability nexus.The results show that economic growth and institutional improvements are key channels through which FDI enhances sustainability, though excessive growth may harm long-run sustainability.The effects of FDI vary depending on the level of institutional development, indicating the context-dependencies of baseline findings.Although FDI generally fosters sustainability, its benefits diminish in advanced institutional settings.In weaker institutional environments, FDI flows and reforms reinforce each other, creating virtuous feedback loops.Robustness checks confirm these findings, underscoring the need for strategic FDI management and institutional reforms.