Institutional Governance and Global FDI Convergence: Examining the Impact of Institutional Quality on Investment Flows

Abstract

The global investment landscape presents challenges as subdued growth prospects, geopolitical tensions, and economic disintegration reshape international investment. Increasing tensions are making globalization more exorbitant and uncertain. Increasing trade barriers, intensified scrutiny of investments, and reputational risks are shaping foreign direct investment (FDI) strategies, prompting a shift in focus from efficiency to navigating geopolitical risks and opportunities. This research examines the convergence traits of FDI inflows among 179 nations, utilizing the Phillips and Sul club grouping method and the log t regression analysis covering the years from 1999 to 2022. Our research results denote a divergence in FDI inflow across the sample. However, the study identified three convergence clubs after applying the club clustering technique. The regional analysis results reveal provisional convergence across the regions—Latin America, Africa, Europe, North America, and the Caribbean. Discoveries by the ordered logit and probit models emphasized the crucial role of institutional governance on club membership in FDI convergence. The study recommends that policymakers prioritize maintaining macroeconomic stability, fostering a predictable investment climate, and ensuring transparency and accountability within these groups. Also, regional blocs should support policy harmonization and cooperation within regions to promote FDI convergence, considering the unique characteristics of each region.