Does institutional quality matter for foreign direct investment flows? Empirical evidence from BRICS economies

PurposeThis study attempts to assess the role that institutional quality (IQ) plays in influencing inflows and outflows of Foreign Direct Investment (FDI) for BRICS nations as burgeoning FDI is flowing into and out of these countries. Moreover, this paper explores the impact of individual governance indicators separately on the FDI flows.Design/methodology/approachThe study analyses this nexus for these emerging economies for the period 1996-2019 using autoregressive distributed lag technique.FindingsThe study indicates a significant and positive coefficient for IQ in India and South Africa, suggesting that improving IQ would enhance the IFDI. However, for outward FDI (OFDI)-IQ linkage, the results show a negatively significant impact of IQ on OFDI for Brazil and Russia. Additionally, the authors observe control of corruption as a significant institutional component for attracting inward FDI for Brazil, India and South Africa, whereas it is an insignificant factor for Russia and China. Further, the authors notably find that upgrading the governance indicators will decrease the level of OFDI for Brazil, Russia, China and South Africa. On the contrary, findings suggest that improving the IQ will foster the OFDI for India.Originality/valueThis study uses time-series analysis instead of cross-country analysis (used extensively in literature), avoiding heterogeneity. Further, this study explores the IFDI-IQ link for BRICS nations, which are captivating a significant chunk of IFDI, and still not given much attention in the extant literature. Moreover, the authors identify the impact of IQ on the OFDI, neglected by the existing studies.