The quality of institutions in terms of FDI attractiveness

<p>Nowadays foreign direct investment (FDI) significantly affects the development of host countries. In particular it promotes their sustained economic growth therefore the main task of all states consists in making favorable business - climate of the country in order to attract bigger number of investors.</p><p>Thereupon it is necessary to investigate the key determinants which influence FDI inflows and its volatility. Previous studies (Bissoon, 2012) analyzing the link between FDI and economic growth have identified that it`s crucial to investigate not only economic but also institutional factors. In most cases good quality of institutions has a positive effect on FDI inflows (B&eacute;nassy-Qu&eacute;r&eacute;, Coupet, Mayer, 2010).</p><p>The aim of this research is to analyze the factors which influence FDI inflows and to investigate the impact of foreign direct investment on FDI volatility.&nbsp;&nbsp; This aim involves the following tasks: to study theoretical background of foreign direct investments; to analyze existing concepts devoted to international capital flows; to systematize data on economic and institutional indicators; to develop econometric model; to examine the effectiveness of institutions inside the country, relying on the established econometric model.</p><p>The methodology of work consists in revelation of existing regularities of attraction of FDI on the basis of the overview of the foreign works devoted to this subject and carrying out the econometric analysis of dependence of volumes of FDI and indicators of their volatility from various factors, including institutional characteristics of the country, comparison the received results.</p><p>The features of the econometric model are original set of economic and institutional variables and the time period from 2005, because statistical data of the majority of the institutional variables are available only since this year, to 2012.</p><p>As a result of econometric analysis it was found out that among developed and developing countries gross domestic product per capita, rate of its growth, trade openness of the country (the volume of foreign trade in goods and services), unemployment and inflation are key economic factors of FDI inflows whereas low level of corruption and political stability in the state act as the major institutional factors of investment attraction. FDI volatility mostly depends on macroeconomic indicators which include gross domestic product per capita, the volume of foreign trade the level of corruption. In comparison with the developed countries foreign investments into developing countries are more sensitive to gross domestic product per capita and the level of corruption.</p><p>Thus this research shows the importance of institutional factors which has a significant impact on FDI inflows and as a consequence on attraction of foreign investors.</p><p>&nbsp;</p>