This study examines the impact of institutional quality in attracting FDI in Algeria over the period 1995-2011 using the Heritage Foundation’s economic freedom index which reflects economic institutional quality (EIQ) and two governance indicators, namely: government effectiveness (GE) and voice and accountability (VA) that represent political institutional quality. The Johansen cointegration test has been employed in order to investigate the existence of long-run relationships among the tested variables. Additionally, the vector error correction model (VECM) has been applied to analyze the long-run and short-run dynamic relationships among the various time series, besides using both impulse response functions and variance decomposition. The main results indicate that there is a long run relationship among the tested variables and the VECM confirms the existence of this relationship. It is also revealed that both EIQ and VA have long-term positive effects on FDI inflows in Algeria. In the light of the results obtained from this study, it could be concluded that the improvement of economic freedom and voice and accountability in Algeria can be considered a fruitful plan for providing good investment climate and attracting more FDI inflows in the long term.
Topics in Middle Eastern and North African Economies, electronic journal, Volume 16, Middle East Economic Association and Loyola University Chicago, September, 2014, http://www.luc.edu/orgs/meea/
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