Bayesian estimates of FDI flows: the governance problem

Abstract

This study uses Bayesian methods to estimate the impact of various governance measures on cross-country Foreign Direct Investment (FDI) flows. The governance measures are highly correlated such that estimation by standard methods does not provide reliable estimates of their individual impact. The results suggest that FDI inflows are influenced by a country's governance structure.

Notes

¹The six governance indices provide measures of: political stability (STAB); rule of law (LAW); graft (GRAFT); regulatory burden (REG); voice and political freedom (VOICE); and government effectiveness (GOV). The correlation coefficients among the variables are found in Table 1.

Table 1. Correlation matrix

²In fact the estimated model included other dependent variables which we here omit, and which do not affect the main results.