The effect of institutions on the foreign direct investment-growth nexus: What matters most?

Chengchun Li, Sailesh Tanna, Baseerit Nissah

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This paper examines the extent to which host-country institutions influence the relationship between inward foreign direct investment (FDI) and economic growth. We develop a theoretical model to analyse how different types of institutions condition the FDI-growth relationship and use various institutional proxies to conduct threshold estimations on panel data for 51 developed and developing countries over the period 1991-2016. Our results consistently reveal a robust, contingent effect of political stability on the FDI-growth nexus, suggesting that, among all the institutional factors considered, the absence of civil conflict or violence in the host economy is most critical in terms of yielding both direct and indirect growth-enhancing benefits associated with technology transfer and spillover effects from FDI inflows. This finding is pertinent to both developed and developing countries, although the threshold level of political stability required to achieve sizeable growth benefits from FDI tends to be lower for developing countries.
Original languageEnglish
Pages (from-to)1999-2031
Number of pages33
JournalThe World Economy
Issue number7
Early online date26 Oct 2022
Publication statusPublished - 1 Jul 2023

Bibliographical note

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.© 2022 The Authors. The World Economy published by John Wiley & Sons Ltd


University Research Projects of Philosophy and Social Sciences, Jiangsu Province, China. Grant Number: 2020SJA1210
Humanities and Social Sciences Youth Foundation, Ministry of Education, China. Grant Number: 22YJCGJW004


  • Foreign direct investment
  • political institutions
  • economic institutions
  • economic growth
  • threshold estimation


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