Does Institutional Quality Matter for Foreign Direct Investment and Human Development?

• Published in: Evaluation review Vol. 48; no. 4; pp. 610 - 635
• Main Authors: Thi Cam Ha, Van, Doan, Tinh, Holmes, Mark J., Tran, Tuyen Quang
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA SAGE Publications 01.08.2024; SAGE PUBLICATIONS, INC
• Subjects: Comparative studies; Developed Countries; Developed Nations; Developing Countries; Economic development; Foreign investment; Generalized method of moments; Governance; Human Development; Humans; Investments; LDCs; Foreign direct investment; threshold estimation; institutional quality; generalized method of moment; human development
• ISSN: 0193-841X; 1552-3926; 1552-3926
• DOI: 10.1177/0193841X231195798

This study examines the relationship between foreign direct investment (FDI), institutional quality and human development) in host countries from 2002 to 2019, using the Human Development Index [HDI] as the measure of human development. This study utilized a panel dataset of 143 countries, including both developed and developing economies, over a 17-year period. Additionally, the study employed a GMM (generalized method of moments) estimator to address unobservable heterogeneity and simultaneity. This study reveals a significant positive relationship between FDI and human development, with a stronger effect observed in developing countries compared to in developed countries. Notably, the impact of FDI-HDI nexus is larger in countries with moderately high-quality institutions, irrespective of their income level. Furthermore, good governance plays a crucial role in enhancing human development, as developing economies with high governance quality experience a greater impact of FDI on HDI compared to other countries. The findings of this study suggest that attracting FDI can be beneficial for enhancing the HDI, especially in developing countries. Additionally, the study highlights governance as a moderating factor in the relationship between FDI and HDI. Improving governance quality can enhance the positive impact of FDI on human development in host countries, especially in developing countries.