Impact of transparency on FDI inflows in European countries: a dynamic panel quantile regression approach

The essence of Foreign direct investment (FDI) inflows is to account for the shortfall in local investment capital, managerial expertise, create job opportunities, to gain access to technological knowledge, etc. Due to these, economies around the world not minding the level of advancement are striving and competing for it in a bid to derive the benefits accrued from it. The institutional environment such as transparency plays a vital role in the integration of international transactions which includes FDI. The relevant of foreign direct investment contribution to economic growth and development is undeniably huge, the means of attracting it to the recipient economy is contingent on not only traditional factors but also on untraditional factors (transparency inclusive). However, these have not received adequate attention in the empirical studies in the context of European economies. In the competitive world nowadays, transparency is getting recognized as one of the important drivers of economic growth. In view of the above, evaluating the nexus of transparency and FDI inflows is imperative. Hence, this study examines the impact of transparency on foreign direct investment (FDI) inflows in a panel of 41 European countries for the period of 1998 to 2016, using the dynamic quantile regression for panel data with non-additive fixed effects that addresses endogeneity and simultaneous problems through the inclusion of lagged dependent variable as instrument. The empirical findings demonstrate that transparency is positive and statistically determinant of FDI inflows. The alternative index namely corruption perception index as another transparency measure also shows the same finding. The quantile regression results (when disaggregated) also suggest that the transparency is more crucial in attracting higher FDI in high-income countries than upper-middle-income countries. The empirical investigations lead to a number of policy implications. First, the policy maker (government) should formulate and implement policies that will promote and guarantee transparent business environment such as decline in corruption level, efficient and sound bureaucracy, rule of law that is blind, absence of repudiation of contracts and expropriation of property. Second, the relevant stakeholders should partnership with international institutions in improving the level of transparency in the recipient economy. With these in place, such economy will serve as an attractive destination of the huge inflows of FDI.

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