Foreign direct investment and institutions: A case of Indian firms

Abstract

The present study examines the effect of institutions on the location choice of foreign direct investment (FDI) using a novel dataset for bilateral FDI of India. My study follows prior works to argue that institutions have a positive association with FDI. The study considers three widely used institutional pillars namely state judiciary system, bureaucracy system, and property right protection to examine the effect of institutions on location choice of FDI. The study extends prior works focusing on the influence of firms’ heterogeneity on the connection between institutions and FDI using the gravity model. The study finds that institutions have a significant and positive impact on the location choice of FDI. The results reveal that institution of developed regions is positively associated with FDI. But surprisingly, there is a negative association between institutions of the developing region and FDI. I put the firms into four separate bins according to their size to capture the firms’ heterogeneity. Results show that large-sized firms are more likely to invest in countries with good institutions.