Analysis of International Capital Inflows and Institutional Quality in Emerging Markets

This study investigates the cointegrating and causality relationships between foreign direct investment (FDI), portfolio (FPI) institutional quality in a sample of 12 emerging market economies for period from 2007 to 2017. A composite index composed Worldwide Governance Indicators was constructed using Principal Components Analysis (PCA) method. The panel autoregressive distributed lag (ARDL) model error correction (ECM) were applied assess causal key variables. In addition finding significant capital inflows (FDI FPI), results confirmed unidirectional FDI FPI long run. further suggested that long-run relationship two more trade-off nature, dependent upon dynamics environment host economy. recommendations include markets should continue open their pursuit inflows, which will reciprocally strengthen domestic environment. Strengthening institutions could curtail persistence weaknesses insulate adverse effects volatile flows and, over run, enhance inflows.