No. 230 - Foreign direct investment and institutional quality

Several factors contribute to attracting foreign investment: cyclical, such as demand fluctuations; structural, such as industrial specialization or the presence of natural resources; fiscal policy, including taxes; political, such as social stability and country governance; and finally, the overall quality of institutions. According to our estimates, the quality of institutions - measured by the World Bank’s Doing Business indicators - has a positive and significant effect in attracting foreign investment, even controlling for other relevant characteristics of the target countries. The time and complexity of procedures, rather than their costs, are key determinants in foreign investors’ choices. Italy, which receives less FDI than countries with similar economic characteristics, lags behind in those indicators of institution quality that most affect the allocation of investment. According to our analysis, if Italian institutions had been qualitatively in line with the euro-area average, foreign investment inflows would have been 15% (about 16 billion euros) higher during the 2006-2012 period.