Institutional quality and its impact on the facilitation of foreign direct investment

Abstract

Purpose Improvements in the facilitation of foreign direct investment (FDI) through institutional quality play a significant role in the establishment of an open economy. However, the impact of institutional quality on the facilitation of FDI along the Belt and Road countries is not well explored. This study aims to empirically investigate the influence of institutional quality on the degree of FDI facilitation and explore the impact mechanism using national-level panel data from countries along the Belt and Road. Design/methodology/approach For the data set, all variables have been normalized, and principal component analysis has been used. For the empirical models, robust standard errors and dynamic GMM method have been used to alleviate heteroscedasticity and endogeneity. Findings The empirical results indicate that institutional quality has a significantly positive effect on the degree of FDI facilitation. Furthermore, the impact mechanism involves the mediating mechanism. In other words, the effect of institutional quality that promotes FDI facilitation is influenced by factors such as laws and regulations. In addition, the implementation of the Belt and Road Initiative (BRI) has significantly enhanced the promotional effect of institutional quality on the facilitation of FDI. Practical implications Policymakers should focus on improving the institutional quality and the influence of mediating mechanisms, such as policies and regulations, in the institutional environment. Originality/value This study contributes to extant literature on the impact of institutional quality on FDI facilitation of significance to China, the BRI countries, and other countries to facilitate openness in international investment. This study also contributes to the extant literature on the influence of the BRI on the development of BRI countries. This will inform policy makers, investment institutions and enterprises about the development of effective policies to aid the development of BRI countries and improve the efficiency and the returns on FDI.