Good institutions, more FDI? Evidence from Indian firm-level data

The study examines the effect of institutional quality on the FDI of Indian firms at the intensive country margin. In the present study, the state judiciary system, bureaucracy system, and property-right protection are taken to represent the institutional quality of the host country. The study focuses on examining the effect of institutional quality on FDI controlling for the heterogeneity at the firm level. The results show that institutional quality does have a significant effect on FDI at the intensive country margin. The result suggests that, ceteris paribus, the increase in institutional quality leads to an average increase [exp(0.498)-1]*100 = 60.5% in FDI from Indian firms. The results reveal that FDI from large firms is positively associated with the institutional quality of the host country. The results also reveal that the institutional quality of developed regions is positively associated with FDI. However, there is a negative association between the institutional quality of the developing region and FDI. The firms usually prefer to invest in institutionally sound developed countries (self-selection). To address the source of endogeneity the ‘selection effect’ is explicitly controlled by using a two-stage average treatment effect (ATE). The result is consistent with the initial findings.