The Effect of Quality of Institutions and Performance of Economic Policies on Foreign Direct Investment in OPEC & G8: the Approach of Panel Vector Auto Regression

Foreign direct investment is one of the affective factors on economic growth. This paper investigates the effect of economic policies through indexes of economy openness degree, liquidity and real interest rate with emphasis on role of institutions on foreign direct investment (FDI) in two groups of G8 and OPEC countries over the period of (2000-2010). The results from response functions in estimated panel data vector auto regression model show i) quality of institutions which contain government effectiveness, political stability and absence of violence, rule of law and the regulatory quality in the public sector has a positive effect on FDI in G8 countries; ii) policies such as trade freedom, growth of liquidity and decreasing real interest rate lead to more FDI, only with existence of institutional suitable conditions such as political stability, rule of law and high productivity of government. These findings help to policy maker to provide conditions that make more FDI inflow.