Governance, Foreign Direct Investment, and Economic Growth: An Institutional Approach to the Interaction in Emerging Economies

This paper investigates the dynamic interaction between governance quality, foreign direct investment (FDI), and economic growth in a panel of 13 emerging countries during the period 1996-2023.Using panel econometric models, the study assesses both the direct and interactive effects of governance and FDI on GDP per capita growth, while incorporating trade openness and public expenditure as additional determinants.The findings reveal three major insights.First, governance plays a decisive role in fostering economic growth: a 1% improvement in governance indicators is associated with a 0.5156% increase in per capita GDP, underscoring the centrality of institutional quality in growth dynamics.Second, FDI by itself exhibits a negative standalone effect on growth (-0.1736%),often explained by profit repatriation, market dominance of multinational firms, and limited technology spillovers.Third, the interaction between governance and FDI significantly reverses this negative effect, leading to a 0.6194% positive impact on growth.This demonstrates that only under conditions of transparency, rule of law, and institutional accountability can FDI be transformed into a driver of sustainable development.Additional results confirm that trade openness contributes positively to economic growth (+0.2091%),consistent with modernization and technology transfer theories.Conversely, excessive public expenditure hinders economic performance, with a 1.2568% decrease in per capita GDP when national spending is inefficiently allocated toward consumption rather than productive investment.The study concludes that strong governance acts as a catalyst, converting FDI into a sustainable growth engine.Without institutional quality, foreign investment risks exacerbating dependency and capital flight.This research contributes to policy debates by emphasizing that governance reform is a prerequisite for maximizing the developmental benefits of FDI in emerging economies.