IMPACT OF LEGAL AND REGULATORY QUALITIES ON FDI INFLOW: A COMPARISON OF DEVELOPED AND DEVELOPING COUNTRIES

Abstract

The objective of this research is to determine the impact of legal and regulatory qualities on foreign direct investment (FDI) inflows and explore its impact in developed and developing countries, comparatively. The sample comprises data on FDI inflows from 66 countries, spanning the period 2008 to 2021. To estimate the regression parameters, the quantile regression with fixed effects model proposed by Machado and Santos Silva (2019) was employed. Additionally, the regression results were supported using random effects and fixed effects models with Driscoll-Kraay (1998) standard errors. The results of the quantile regression analysis reveal that legal and regulatory qualities have a positively significant effect on FDI inflows. This impact is greater in developing countries than in developed countries, and the discrepancy increases with higher FDI levels. These findings hold important policy implications for decision-makers. To attract FDI, particularly in developing countries, it is crucial to strengthen legal systems by safeguarding property rights, establishing contractual certainty, and implementing effective dispute resolution mechanisms. More so, efforts should be taken to reduce rent-seeking behavior and prevent powerful groups from receiving unfair advantages. Failure to address these issues may increase the risks and impede a country's economic development in the long run.