Analysis on the Impact of Institutions on Inbound FDI Using Principal Components

This study analyzed the impact of institutions on FDI inflows using panel data for 192 countries from 2006 to 2023. The Worldwide Governance Indicators and Fragile State Index were used as variables representing institutions, and the fixed-effects model and system GMM were used as analytical methods. Furthermore, the principal components of the WGI and FSI were included in the analysis. The results were consistent with previous research showing that institutional improvements promote FDI inflows. This finding was confirmed in analyses that controlled for endogeneity using system GMM, and was also consistently confirmed in analyses that included the principal components of the WGI and FSI. Analysis using the 6 indicators in WGI representing institutions revealed different results between advanced and developing countries. In advanced countries, regulatory quality and the rule of law were significant variables for FDI inflows, whereas in developing countries, political stability, government effectiveness, the rule of law, and control of corruption significantly promoted FDI inflows.