Impact of institutional and regulatory quality on FDI inflow: case of a developing Indian economy

Abstract

The study examines the impact of regulatory & institutional quality (IQ) on FDI inflows, focusing on select factors to explain evolving FDI patterns in India over 2006–2019. India, one of the top 5 FDI attracting nations in the Asian region, is taking various measures to improve IQ and encourages FDI. The reforms facilitating the Ease of starting business and reduction in EPU significantly and positively impacts FDI; however, the measures easing trade across border and resolving insolvency has a positive but insignificant impact of FDI. In addition, deteriorating Labor Freedom significantly inhibits FDI. The results demonstrate that improvement in IQ positively influences FDI; however, the IQ impact is insignificant in some cases due to the weak institutional structure. The study suggests that IQ factors tend to be pivotal in attracting FDI inflows, but India is yet to arrive.

Keywords:

• Foreign Direct Investment
• institutional quality
• India
• doing business
• C1 F2 O1

Public Interest Statement

The study examines the impact of India’s institutional quality (IQ) on FDI inflows, focusing on select factors over 2006–2019. India, one of the top 5 FDI attracting nations in the Asian region, takes various measures to improve IQ and attract more FDI. Our finding demonstrates that reforms facilitating the Ease of starting a business and reduction in EPU significantly and positively impacts FDI; however, the measures easing trade across the border and resolving insolvency has a positive but insignificant impact on FDI. Thus improvement in IQ positively influences FDI; however, the IQ impact is insignificant in some cases due to the weak institutional structure. The findings have implications for Indian policymakers to enhance good governance via adequate institutional reforms and strengthen the gaps in existing policies to attract a substantial portion of FDI flowing in the Asian region.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. https://www.worldbank.org/en/news/press-release/2019/10/24/doing-business-india-top-10-improver-business-climate-ranking

2. https://www.deccanchronicle.com/nation/current-affairs/040719/economic-survey-top-policymakers-must-ensure-predictable-policy-actio.html

3. https://www.india-briefing.com/news/how-to-read-indias-pitch-foreign-investors-looking-shift-china-20368.html/

Additional information

Funding

The author received no direct funding for this research.

Notes on contributors

Leena Ajit Kaushal

Leena Ajit Kaushal is currently working as Assistant Professor in the area of Economics at Management Development Institute, Gurgaon, India. Her teaching interests include Macroeconomic Environment ߪ Policy, Foreign Direct Investments and International Economics. Her research interest lies in the field of Sustainable Development, Foreign Direct Investment, Macroeconomic policy and Sharing Economy. She is Associate Fellow of the Higher Education Academy (HEA), UK and possesses over 15 years of experience across a range of verticals which include University teaching in multinational and cross-cultural teaching environment, Investment banking industry and research fellowship with UGC grant commission. She is credited with research publications in various refereed national and international journals. She has published books on Managerial Economics by Thompson Publishing, ‘Global Entrepreneurship and New Venture Creation in the Sharing Economy’ by IGI Global and FDI-The Indian Experience by BEP publishers. Her email address [email protected]