The Impact of Host Country Institutional Factors on International Investments

Miriam Nebenführ
August 2024

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Abstract

Scholars have long examined the influence of host country institutional factors on foreign direct investment (FDI) location decisions by multinational enterprises (MNEs). This study empirically examines the relationship between two institutional factors, democracy and political stability, and FDI using a large panel dataset of secondary data covering the years 2003 to 2021. In addition to multiple regression analysis, this study also employs the new necessary condition analysis (NCA). Relying on Dunning’s OLI model and institutional theory, the main finding is that democracy has a significantly positive effect on FDI, while political stability has a significantly negative effect. Moreover, both factors are necessary conditions for FDI: Countries do not receive FDI if certain levels of those factors are not reached. The results contribute to the understanding of how certain institutional factors influence FDI location decisions and provide insights into necessary conditions in international business research.