Foreign direct investment in the G-20

to what extent do institutions matter?

Abstract

Purpose – This study aims to identify to what extent the economic factor effect is more salient in shaping inward foreign direct investment (IFDI) than are institutional factors in G-20 inflow patterns. Design/methodology/approach – Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) method was applied using the World Bank Governance and Development Indicators, followed by a panel data technique over the period 2005-2015 to estimate the connections between the different dimensions of economics, institutions and IFDI in the G-20. Findings – Results showed that countries with better economic performance contrasting with the governance indicators are more effective at attracting IFDI. However, the correlation between FDI intensity and governance indicators has been found relatively weak, which may suggest a more controversial role of institutions as determinants of IFDI. Research limitations/implications – This quantitative approach uses a country-level set of variables; therefore, the authors suggest the development of more firm-level analysis of the impact of institutions. Also, the limitation of the TOPSIS method itself is based on heuristic assumptions. Practical implications – The main findings point to a relatively low impact of institutions on IFDI. The authors suggest that the global financial crisis has changed the rationale of decision-making by multinational companies. Originality/value – The originality of the present study was to apply a multi criteria decision-making technique on FDI’s analysis combined with institutional data.