Title:
INSTITUTIONAL FACTORS AFFECT FOREIGN DIRECT INVESTMENT FLOWS

Authors:
Lee Sin Yee, Har Wai Mun , Low Hoong Chun , Soo Qiao Qi and Khong Yeen Lai

Abstract:
The foreign direct investment (FDI) flow has brought a huge attention when comes to the overall economy condition for a country. Over the years, quality of institutional factor is always the first priority to investors. We proposed this study is to determine the impact of institutional factors toward FDI flow in poor countries. We have tested the relationship of institutional factors and FDI in 15 International Development Association (IDA)-supported countries ranging from year 2006-2013. We used Country Policy and Institutional Assessment (CPIA) Business Regulatory Environment Rating, CPIA Financial Sector Rating and CPIA Fiscal Policy Rating as independent variables while FDI as the dependent variable. According to two-step System GMM model, we identified that CPIA Financial Sector Rating and CPIA Fiscal Policy Rating had significantly positive impacts on FDI. However, CPIA Business Regulatory Environment had an insignificant negative result. Thus, we concluded that government and policymakers should focus on creating a prudent fiscal policy and improve financial sector to obtain higher CPIA ratings and attracting FDI inflow