Institutional Quality and Foreign Direct Investment in Bangladesh: An Empirical Analysis
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Abstract
The purpose of this paper is to examine the institutional quality and foreign direct investment inflow of Bangladesh. This study focuses particularly on the legal and political institutions to examine the relationship between legal governance, political stability, and voice and accountability in relation to FDI inflow in Bangladesh over the period from 1996 to 2023. The OLS regression is employed for analysing the impact of institutional quality and FDI inflow. Firstly, Principal Component Analysis (PCA) is employed to tackle the dimensionality of institutional quality indicators. Secondly, two principal components, indicating legal institutions and control, and political institutions, are employed to analyse the relationship between different dimensions of institutional quality and FDI. Consistent with institutional theory and transaction cost theory of FDI, the findings suggest that legal governance has a strong positive impact on FDI inflows in Bangladesh. Stronger rule of law and control of corruption attract higher FDI inflows. Interestingly, political stability showed a significant negative correlation with FDI inflow over the study period. This indicates that political stability not accompanied by stronger institutional governance may negatively impact inward FDI. The results highlight the critical role of different dimensions of institutional quality in attracting FDI inflows in an emerging country context. Policymakers should focus on strengthening governance structures, particularly in the areas of corruption control and rule of law enforcement, to foster FDI inflows in emerging countries like Bangladesh. Bangladesh.
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