Abstract:

In the literature, interest in the motives of international capital movements has been increasing day by day due to the advantages that they provide to the host economy and the upward trend of these movements throughout the world since the 1990s. At the same time, the fact that institutional economics has become popular and, compared to other approaches, is more successful in reflecting real life, also increases the tendency to utilize institutional tools in explaining economic facts. In this study, it is aimed to determine institutional factors affecting direct foreign investment (FDI) inflow in developing countries. In this context, panel regression analysis has been conducted with data of 38 developing countries between the years of 2002-2016. In the study, Driscoll-Kraay estimators has been used to generate parameters that are resistant to heteroscedasticity, autocorrelation, and cross section dependency problems. In order to achieve the robustness of application, two model groups including variables of the corruption and the control of corruption has been employed and, unlike other studies, the interaction variables obtained by multiplication with the dummy variable created from the variable of the rule of law were included in the models. As a result of the analysis, it has been determined that the most important determinants of institutional factors affecting foreign direct investment inflows to host countries are economic freedom, political stability and regulation quality. In addition, corruption has increased foreign direct investment inflows in countries where the rule of law has not been provided, and corruption has reduced direct foreign investment inflows in countries where law is relatively more effective. The results of the analysis show that foreign investors prefer countries with high levels of economic freedom, politically stable and quality private sector. In addition, investors prefer the countries where bureaucratic obstacles can be overcome via corruption among countries that cannot provide the rule of law. Therefore, countries seeking to attract foreign direct investment need to take the institutions as a whole and make a total arrangement that will provide investors with a more peaceful and free environment away from strict bureaucratic obstacles.

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