Impact of Institutional Quality and Macroeconomic Policies on Domestic Private Investment: A Panel Data Approach

Abstract

The study examined the impact of institutional quality and macroeconomic
policies on DPI (DPI), utilizing annual panel datasets spanning from 2005 to
2021 across sixty countries of high, middle, and low-income economies. The
study used the principal component analysis to generate an index for quality
of governance and dynamic GMM approach. The study revealed a positive
significant impact of quality of governance (0.00095) at 1%, exchange rate
(0.00419) at 1%, and FDI inflow (0.00683) at 5% on DPI, while GDP (-
0.00616) is associated with negative significant impact on DPI at 10%. In
conclusion, enhancing property rights, implementing sound monetary and
fiscal policies, reducing trade barriers, promoting free trade, and facilitating
technology transfer to local investors are vital steps to stimulate DPI and
mitigate the crowding-out effects of FDI on DPI.