Navigating through investment obstacles in the emerging markets: the specific role of macroeconomic governance indicators for the inflow of foreign direct investment

Abstract

Following the Asian financial crisis in 1997-1998, macroeconomic governance focusing on the institutional quality of emerging markets has become an important research area in the context of corporate governance and investor protection within finance. Meanwhile, the inflow of foreign direct investment to emerging markets has continued to increase, especially into Asian countries. The main purpose of this thesis is to separately examine the six governance indicators, which were developed by Kaufmann, Kraay and Mastruzzi at the World Bank, for the inflow of foreign direct investment into the emerging markets, both global and Asian. This thesis will make use of panel data from 1996 to 2008 for 37 emerging market countries and include macroeconomic control variables. The empirical results indicate that control of corruption, regulatory quality, level of development, trade openness, gross capital formation and household consumption expenditure are important determinants of global FDI inflows. However, for Asian countries, the results show that rule of law, political stability, level of development, trade openness and household consumption expenditure are crucial determinants for the recent inflow of FDI.