Institutional Quality and International Capital Flows to the Emerging Economies

Abstract

The international capital flows and the factors influencing them are imperative in this era of globalization and financial liberalization. This paper empirically examines the role of institutional quality in enticing foreign capital flows in emerging market economies (EMEs). A panel data set for the period 1995-2018 is used for the 24 major EMEs including Argentina, Bangladesh, Brazil, Chile, China, Czech Republic, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, and Venezuela.  The system GMM estimation technique of dynamic panel data handling developed by Arellano-Bover (1995) and Blundell-Bond (1998) is employed for the estimation. The empirical results reveal that the FDI inflows are positively and significantly affected by the institutional quality, but the portfolio equity capital inflows are not influenced by any indicator of institutional performance. In other words, the Lucas paradox is explained by the institutional quality only in the case of FDI inflows.  The study accomplishes that the policy aiming at attracting FDI flows by improving institutional infrastructure is expedient for the emerging economies.