Regulatory Quality, Rule of Law and Foreign Direct Investment Inflows: Evidence from the Economic Community of West African States

Authors

  • Innocent Chile Nzeh Department of Cooperative and Rural Development, University of Agriculture and Environmental Sciences, Umuagwo, Imo State
  • Uju Victoria Okoli Department of Economics, Nnamdi Azikiwe University, Awka, Anambra State
  • Joan Nwamaka Ozoh Department of Economics, Nnamdi Azikiwe University, Awka, Anambra State
  • Florence Ngozi Ezenwob Department of Economics, Nnamdi Azikiwe University, Awka, Anambra State

DOI:

https://doi.org/10.56225/ijfeb.v3i1.282

Keywords:

Foreign Direct Investment inflows, Institutional quality, Gross Domestic Product, Panel ARDL, Regulatory quality, ECOWAS

Abstract

In literature, the role of institutions in stimulating FDI inflows has been documented. This study examined the contributions of two institutional-quality variables, regulatory quality and the rule of law, in attracting FDI in the Economic Community of West African States (ECOWAS). The study used an annual series covering the period from 2000 to 2020 using three different estimation techniques: the panel ARDL, the panel FMOLS, and the panel DOLS. Findings reveal that while the rule of law had a negative and significant impact on FDI inflows under the panel ARDL and FMOLS, the impact of regulatory quality was negative and significant under the panel ARDL and DOLS. The short-run ARDL results revealed that only the population growth rate positively and significantly impacted FDI inflows. However, in the long run, findings showed that while the population growth rate had a positive and significant impact on FDI inflows under the ARDL, the impact of GDP was positive and significant in all the models. The exchange rate was also found to negatively and significantly impact FDI inflows in all the models. The study consequently recommends building strong institutions through collaboration among the member countries while improving human capital and economic growth.

References

Abere, S. S. and Akinbobola, T. O. (2020). External shocks, institutional quality, and macroeconomic performance in Nigeria: Sage Open, 10(2), 1–18.

Adegboye, F, B., Osabohien, R., Olokoyo, F. O., Matthew, O, and Adediran, O. (2020¬¬). Institutional quality, foreign direct investment, and economic development in sub-Saharan Africa. Humanities and Social Sciences Communications, 7(38). https://doi.org/10.1057/s41599-020-0529-x

Aron, J. (2000). “Growth and institutions: A review of the evidence”. The World Bank Research Observer, 15(1), 99–135. https://doi.org/10.1093/wbro/15.1.99.

Behera, C., Mishra, B, R., Priyadarshini, B, T. and Satpathy, L. D. (2020). Institutional quality and foreign direct investment inflows: Evidence from cross-country data with policy implication. International Journal of Economics & Business Administration, 8(2), 302-316.

Bentzen, J. Engsted, T. (2001). A revival of the autoregressive distributed lag model in estimating energy demand relationships. Energy, 26(1), 45–55.

Cambazoglu, B. and Gunes, S. (2016). The relationship between foreign exchange rate and foreign direct investment in Turkey. Economics, Management & Financial Markets, 1(11), 284-293.

Chaib, P. B. andd Siham, M. (2014). The impact of institutional quality in attracting foreign direct investment in Algeria. Topics in Middle E astern & African Economies, 16(2), 142-163.

Challe, E., Lopez, J. and Mengus, E. (2019). Institutional quality and capital inflows: Theory and evidence. Journal of International Money & Finance, 96, 168–191.

Chen, F. and Jiang, G. (2021). Investigating the impact of institutional quality on FDI: Are there promotional effects in economic integration regions?” Sustainability, 13, 11309 https://doi.org/10.3390/su132011309

Chen, F. and Jiang, G. (2023). The impact of institutional quality on foreign direct investment: empirical analysis based on mediating and moderating effects. Economic Research-Ekonomska Istrazivanja, 36(2), 2134903. DOI: 10.1080/1331677X.2022.2134903

Clausen, T. H. (2014). The role of institutional arbitrage in the search for product innovation:

Firm level evidence from Norway. Industrial Marketing Management, 43(3), 392–399. https://doi.org/10.1016/j.indmarman.2013.12.007

De Mello, L (1999). Foreign direct investment led growth: Evidence from time series and panel data. Oxford Economic Papers, 51, 133-151.

Dickey, D. A., and Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057–1072. Available at: https://doi.org/10.2307/1912517.

Dobrowolska, B., Dorożyński, T and Kuna‑Marszałek, A. (2021). Institutional quality and its impact on FDI inflow: Evidence from the EU member states. Comparative Economic Research. Central and Eastern Europe, 24(4). https://doi.org/10.18778/1508-2008.24.29.

Engle, R. and Granger, C. (1987). Cointegration and error-correction: Representation, estimation and testing. Econometrica, 55(2), 251-276. doi:10.2307/1913236.

Fazio, G. and Talamo, G. M. C. (2008). How attractive is good governance for FDI? in J. Jay Choi, Sandra Dow (ed.). “Institutional approach to global corporate governance: Business systems and beyond. International Finance Review, 9, 33-54.

Gammadigbe, V. (2021). Trade integration in West Africa: Does the quality of institutions matter?. Journal of African Trade, 8(1), 65-81.

Hea-Jung, H. (2018). Institutional quality and trade in intermediate goods. Journal of Korea Trade, 22(2), 162–186.

Hoff, K. and Stiglitz, J. E. (2005). The creation of the rule of law and the legitimacy of property rights: The political and economic consequences of a corrupt privatization. Policy Research Working Paper Series 3779, Washington DC: The World Bank.

Imran, M. and Sial, M. H. (2021). The role of stock exchange and public spending on economic growth in selected SAARC countries: A panel data analysis. Journal of Critical Reviews, 8(01), 928-939.

Jurčić, L., Franc, S. and Barišić, A. (2020). Impact of institutional quality on foreign direct investment inflow: Evidence from Croatia. Business Systems Research, 11(1), 44-58. https://doi.org/10.2478/bsrj-2020-0004.

Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel Data. Journal of econometrics, 90(1), 1-44.

Kaushal, L. A. (2021). FDI and institutional quality: Empirical evidence from India. The Business & Management Review, 12(2), 58-66.

Khan, Z. U., Khan, A., Khan, D. and Magda, R. (2023). The impact of institutional quality on sectoral foreign direct investment in Pakistan: A dynamic simulated ARDL approach. Sustainability, 15, 7231. https://doi.org/10.3390/su15097231.

Kwaw-Nimeson, E. and Tian, Z. (2023). Institutional quality, foreign direct investment, and regional integration: Empirical evidence from CEN-SAD. SAGE Open, 1–20. DOI: 10.1177/21582440221148389

Le, A. H and Kim, T. (2021). The impact of institutional quality on FDI inflows: The evidence from capital outflow of Asian economies. Journal of Asian Finance, Economics & Business, 8(8), 0335–0343. doi:10.13106/jafeb.2021.vol8.no8.0335.

Levin, A., Lin, C.-F., and Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108(1), 1-24.

Ng, A., Ibrahim, M. H. and Mirakhor, A. (2016). Does trust contribute to stock market development? Economic Modelling, 52, 239-250. https://doi.org/10.1016/j.econmod.2014.10.056

North, D. C. (1990). Institutions, institutional change & economic performance”.Cambridge University Press.

Olayiwola, W., Osabuohien, E. and Okodua, H. (2011). Economic integration, trade facilitation and agricultural exports performance in ECOWAS countries. Epau Monograph series, No. 1.

Oshota, S. O., and Wahab, B. A. (2022). Institutional quality and intra‑regional trade flows: Evidence from ECOWAS. Journal of African Trade, 9, 73-106. https://doi.org/10.1007/s44232-022-00005-9.

Osman, R. H., Alexiou, C., and Tsaliki, P. (2011). The role of institutions in economic development: Evidence from 27 Sub-Saharan African countries. International Journal of Social Economics, 39(1), 142–160.

Paul, J. & Jadhav, P. (2019). Institutional determinants of foreign direct investment inflows: Evidence from emerging markets. International Journal of Emerging Markets, 15 (2), 245–261.

Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and statistics, 61(S1), 653-670.

Peres, M., Ameer, W. and Xu, H. (2018). The impact of institutional quality on foreign direct investment inflows: Evidence for developed and developing countries. Economic Research-Ekonomska Istrazivanja, 31(1), 626-644. https://doi.org/10.1080/1331677X.2018.1438906

Phillips, P. and Perron, P. (1988). Testing for a unit root in time series regressions. Biometrika, 75(2), 335-346.

Rodrı´guez-Pose, A., and Cols, G. (2017). The determinants of foreign direct investment in sub Saharan Africa: What role for governance? Regional Science Policy & Practice, 9(2), 63–81.

Rodrik, D. (1999). Where did all the growth go? External shocks, social conflict, and growth collapses. Journal of Economic Growth, 4, 385-412.

Romer, P. (1993). Idea gaps in economic development. Journal of Monetary Economics, 2(3), 543-73.

Saad, A. F. (2021). “Institutional change in the global economy: How trade reform can be detrimental to welfare. Economic Modelling, 95, 97–110. https://doi.org/10.1016

Sabir, S., Rafique, A. and Abbas, K. (2019). Institutions and FDI: Evidence from developed and developing countries. Financial Innovation, 5(8), 2-20. https://doi.org/10.1186/s40854-019-0123-7

Saha, S., Sadekin, M. N. and Saha, S. K. (2022). Effects of institutional quality on foreign direct investment inflow in lower-middle income countries. Heliyon, 8 (2022), e10828.

https://doi.org/10.1016/j.heliyon.2022.e10828.

Saikkonen, P. (1992). Estimation and testing of cointegrated systems by an autoregressive approximation. Econometric Theory, 8(01), 1-27. doi:10.1017/S0266466600010720.

Stock, J. H. and M. W. Watson. (1993). A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems.Econometrica, 61(4), 783–820. doi:10.2307/2951763.

Uddin, M., Chowdhury, A., Zafar, S., Shafique, S., and Liu, J. (2019). Institutional determinants of inward FDI: Evidence from Pakistan. International Business Review, 28(2), 344-358.

Ukwueze, E. R. and Aguegboh, E. S. (2018). Institutional determinants of economic growth in ECOWAS Sub-Region. International Journal of Economics & Financial Issues, 8(5), 75-79.

Downloads

Published

2024-03-31

How to Cite

Nzeh, I. C., Okoli, U. V. ., Ozoh, J. N., & Ezenwob, F. N. . (2024). Regulatory Quality, Rule of Law and Foreign Direct Investment Inflows: Evidence from the Economic Community of West African States. International Journal of Finance, Economics and Business, 3(1), 10–23. https://doi.org/10.56225/ijfeb.v3i1.282

Issue

Section

Articles
Abstract viewed = 22 times