The Impact of Institutional and Cultural Variables on Attracting Foreign Direct Investment and Economic Development (A Selection of Developing Countries)

Attention to cultural and institutional foundations is one of the processes influencing economic growth and development. In many studies, the role of institutional and cultural factors in attracting foreign direct investment (FDI) and economic growth has been done separately. But, the present study is important because of the role of interaction between institutional and cultural factors in attracting foreign direct investment. So, the purpose of this study is to investigate the relationship between economic growth and foreign direct investment by considering the role of institutional and cultural variables in the group of developing countries.

This study is an applied research according to the type and purpose of the research. The statistical sample includes 16 developing countries during the 1991-2020. Criteria for selecting countries is Homogeneity of some indicators, including; Economic growth, governing indicator, the level of democracy and freedom of trade, the level of development, as well as the availability of the information. Therefore, developing countries including Algeria, Angola, Cameroon, India, Indonesia, Iran, Kuwait, Mexico, Nigeria, Pakistan, Qatar, Saudi Arabia, Tajikistan, Turkey, UAE and Venezuela were selected. In this study, while the effect of variables such as political and economic stability, rule of law and control of corruption and institutional, cultural and variables that can be individually effective in attracting foreign investment are examined also the interaction effects of foreign direct investment and institutional factors have been investigated. The generalized Method of Moment (GMM) approach has been used to investigate the model. This method is one of the appropriate econometric methods to solve or reduce the problem of endogenous variables and correlations between explanatory variables. In this study, two models of economic growth and foreign direct investment were analyzed. Factors affecting economic growth include capital, labor, foreign direct investment, energy consumption, exchange rate, human capital, governance index, degree of openness of the economy, cultural index, the interaction of cultural index and foreign direct investment as well as governance index And foreign direct investment. Factors affecting foreign direct investment also include human capital index, degree of economic openness, economic growth, exchange rate, governance index, cultural index, population, inflation rate and the interaction of cultural index and governance index.

According to the results, white test was used to investigate the heterogeneity of the coefficients. Based on the results of this test, the statistic F is equal to 1.69 with a probability level of 0.1452, which indicates the acceptance of the null hypothesis that there is no heterogeneity of variance. Also, based on the research results, cross-sectional independence of the data is accepted and Levin, Lin and Chou tests are used to examine the stationary of the variables. Based on the results of this test, all variables except the capital variable are stationary. The other variables remain stationary after one-time differentiation. In other words, the degree of accumulation is one and other variables are zero. According to the results of unit root test, in order to prevent false regression, Kao co-integration test has been performed in order to investigate the existence of long-term relationship between variables. Based on the results of which the existence of co-integration between variables is confirmed; therefore, it can be said that there is a long-run relationship between the dependent variable of each model and the independent variables. Finally, the results of estimation of the first model show that all research variables affect the economic growth at a significant level of 95%. Estimated coefficient for economic growth equal to 0.118, labor variable equal to 0.065, energy consumption equal to 0.030, human capital equal to 0.153, degree of economy openness equal to 0.084 and the cultural index equal to 0.147. The interaction of cultural index and FDI on economic growth is also positive and significant. The interaction between the governance index and FDI is 0.143. Based on the results, the Sargan test statistic indicates that the null hypothesis is not rejected and the defined instrumental variables are valid, therefore, the model does not need another instrumental variable. Also, the results of Arlano and Bond test to determine the order of autocorrelation show that the null hypothesis that there is no autocorrelation in the differentiated sentences in the second order of M2 has not been rejected. This finding is in line with Arlano and Bond(1991). They believe that in the GMM estimation, the perturbation sentences should have a first-order serial correlation of AR (1) and a second-order serial correlation of AR (2). In the second model, all research variables affect the rate of foreign direct investment attraction in developing countries. The estimated coefficient for all variables is positive and statistically significant. At the same time, the coefficient related to the exchange rate variable is equal to -0.065. Also, the estimated coefficient for the interaction variable of the index of institutional and cultural factors is equal to 0.238.

In developing countries, investors seem to be attracted to countries that are less linguistically and religiously diverse than in other countries, in other words, foreign direct investment is mainly regional, because the common religion and language and borders are important to foreign investors. On the other hand, foreign investors seem to be investing in countries with similar or better regulatory environments than their own, and preferring to invest in countries with less diverse communities than their own. Also, in justifying the obtained coefficient for the interaction of the index of institutional factors and foreign direct investment, it can be said that appropriate institutional factors attract more foreign direct investment and ultimately increase the economic growth of the studied countries. Also, the interaction coefficient of cultural index and foreign direct investment is equal to 0.013 at the level of 99%, i.e. the existence of countries with less cultural diversity and culture similar to their own country has attracted more foreign direct investment and are closely related to each other. The effect of these two causes the economic growth of the countries studied in this study.