Can stronger governance and institutional quality drive growth through inward foreign direct investments in BRICS nations?

Abstract

Background: This research focusses on the significance of institutional quality (INSQ) and governance in shaping the relationship between foreign direct investments (FDI) and growth. It specifically examines the BRICS nations (Brazil, Russia, India, China and South Africa) because of their economic significance in the global economy.

Aim: This study aims to analyse the impact of INSQ and governance on sustainable growth, with a particular focus on its effects through the channels of FDI in the BRICS countries.

Setting: Annual panel data from the Organisation for Economic Cooperation and Development (OECD) statistics, the United Nations Conference on Trade and Development (UNCTAD) statistics and the World Bank indicators spanning two decades (2000–2022) are used to analyse BRICS nations.

Methods: The research study employed the Bayesian time-varying coefficient vector autoregression (BTVC-VAR) model to achieve the objective of the study.

Results: The findings indicate that there is no long-term relationship between FDI, INSQ and economic growth in the BRICS countries. However, there is a noticeable co-movement among these variables in the short run.

Conclusion: Given the obtained results, the policymakers should prioritise efforts to strengthen institutional capacity in the short term while focussing on the Sustainable Development Goals (SDG-8 and SDG-16).

Contribution: The existing studies have assumed static economic, social and political conditions, potentially failing to accurately depict the complexities of an actual economy. This study offers methodological innovation by employing Bayesian time-varying coefficient vector autoregression (BTVC-VAR), enabling coefficients to adapt to evolving economic conditions over time. This effectively captures the dynamic nature of variables and provides reliable estimates.