INSTITUTIONS AND FDI-GROWTH RELATION IN ASIA: DIRECT AND MODERATING EFFECTS FROM SYSTEM-GMM

Abstract

The growth literature firmly establishes both foreign capital inflows and domestic institutional framework as crucial for long-run economic growth. Also, strong institutions are hypothesized as a critical transmission mechanism by enlarging a host country’s absorption capacity and thereby maximizing the growth benefits of foreign direct investment (FDI). This study seeks to empirically scrutinize how FDI and institutions affect growth, paying special attention to how institutional quality moderates the relation between FDI and growth. By making 5-years non-overlapping averages of the data from 1971 to 2023 for 31 Asian countries, a simple dynamic growth model is estimated via the System Generalized Method of Moments (GMM) estimator aiming to tackle potential endogeneity concerns. The findings explicate that albeit FDI and institutions individually happen significant in promoting growth but there happens no complementarity in both the factors in affecting growth. The policy suggestions stem out from these findings are that the policy makers focus should be on promoting FDI inflow and strengthening the institutions separately, and the later should not be viewed as significant moderator in the former nexus with the growth.