LINKAGES AMONG INSTITUTIONS, INVESTMENT AND GROWTH: THE CASE OF DEVELOPING COUNTRIES

Abstract

The study explores the impact of institutions on foreign and domestic investment as well as analyze the combined effect of institutional quality and investment in fostering economic growth of developing countries. We took the data of 29 developing countries from the list provided by the World Bank, spanning over 2000 to 2018. Six institutional indicators have been employed i.e. political stability, government effectiveness, regulatory quality, rule of law, control of corruption and voice and accountability. The other determinants along with institutional indicators are GDP, trade openness, inflation rate, tariff rate and mobile phone subscribers. The findings show that government effectiveness, regulatory quality, rule of law and control of corruption have significantly positive influence on FDI while all the institutional indicators positively contribute to domestic investment. Moreover, findings show that FDI exert substantially positive effect on economic growth with association to better institutional quality. We evaluated twofold impact of domestic investment on economic growth, independently and via through the channel of institutions. Domestic investment has a considerable impact on economic growth individually, but greater impact with the existence of better institutional quality. We infer from our findings that policy makers should give priority to institutional reforms while formulating policies in order to augment FDI influxes in developing countries, and providing suitable environment for domestic investors. It is the need of hour; governments of developing countries should work on to make their institutional quality better as it is the only way to overcome their development disparities across countries.