The intention of this study is to look into the effect of institutional quality on Foreign Direct Investment (FDI) inflow in lower-middle income countries. To accomplish this goal, we use a panel data set of 28 lower-middle income countries in six different regions that span the period from 2002 to 2018. This analysis is conducted by using dynamic panel estimation (two-step system GMM). Later, we use threshold analysis to capture how the reaction of institutional quality varies in terms of GDP per capita. The empirical outcomes suggest that control of corruption and regulatory quality enhance FDI inflow while high rule of law and voice and accountability mitigate it in lower-middle income countries. On the contrary, government effectiveness, and political stability do not have any significant impact on FDI. Regulatory quality has the greatest impact on foreign investment inflows of all the metrics. Similarly, threshold analysis reveals that regulatory quality has a positive impact on FDI when per capita GDP of FDI recipient nations exceeds the threshold value of 7.197, while voice and accountability have a positive impact on FDI when per capita GDP exceeds the threshold value of 7.776. In terms of the size of the impact of institutional factors in attracting FDI, lower middle incoutries were quite different from that high and low income countries, though the outcome is largely similar in the three subgroups. According to the regional findings, each of the institutional quality measures is only effective in the East Asia and Pacific region. In addition, threshold analysis reveals how institutions respond to the impact of per capita GDP.
Keywords: FDI; GMM; Good governance; Institutional quality; Lower-middle income countries.
© 2022 The Author(s).