The impact of institutional factors on attracting foreign direct investment flows

Intensification of international capital flows is one of the most prominent motors of economic globalization. Recently multinational companies prefer to internalize their production through flows of FDI for increasing efficiency by geographic expansion of their operations and strengthening their position in the world market. The current stage of economic development in the world, in turn, shows that foreign direct investment (FDI) is one of the main factors for sustainable, high-quality and well-balanced economic growth. The need to attract FDI is especially high for developing and transition countries, as this type of investment promotes structural changes of the economy, allows to ensure sustainable economic grows as well as allows the recipient-country to effectively integrate into the process of globalization. In this regard, it is not surprising that nowadays there is a fierce competition between countries for attracting foreign investments, particularly foreign direct investments. The purpose of this thesis is to examine the role of institutional environment on inflows of foreign direct investments in order to identify the most critical institutional factors for attracting FDI. For this purpose, regression analysis was conducted between different indicators of institutional quality and FDI net inflow. The result of the analysis has shown that institutional climate, among other indicators, has an important influence on FDI inflows. Furthermore, it was shown that institutional quality is important not only for FDI attraction, but most importantly, for obtaining possible benefits associated with inward FDI. The final part of the thesis is focused on the analysis of institutional and investment environment in transitional South Caucasus, and especially in Armenia. The choice of the country is based on the following facts: small domestic market of 3 million people and economic blockades, imposed by two neighbor countries, make landlocked Armenia, to some extent, less attractive for certain foreign investors. Whereas factors such as geopolitical situation, size of inner market, abundance of natural recourses (which are undoubtedly having major influence on investment decision-making process) cannot be changed in a short-term period, the importance of high-quality institutional environment and favourable business climate is becoming much more critical for Armenia’s investment attractiveness. The study has been conducted using both general scientific analysis methods and specific economic and mathematical methods – benchmarking study, graph method, various mechanisms of econometric and statistical analysis.