The Influence of Foreign Direct Investment on Sustainable Development: The Moderating Role of Institutional Quality – Evidence From a Bayesian Approach.

Objectives In the context of the growing global emphasis on sustainable development, this study investigates the impact of foreign direct investment (FDI) on the Sustainable Development Index (SDGI), while also considering the moderating effect of institutional quality (IQ). Additionally, it controls for macroeconomic variables such as trade openness, education, infrastructure, inflation, and population growth. The application of the Bayesian method facilitates the assessment of each variable's influence and enhances the accuracy of subgroup analyses. Design/methodology/approach Utilizing panel data from 66 countries between 2008 and 2022, includes 990 observations. This study uses two tests to check the reliability of the results from the main model: the First Difference (FD) model and the Two-Stage Least Squares (2SLS) regression model. We chose these methods to tackle potential issues with endogeneity and to confirm the causal relationships over both short and long periods. Bayesian Mixed Effects Model regression to accurately assess the relationships among Foreign Direct Investment (FDI), Intelligence Quotient (IQ), and Sustainable Development Goal Index (SDGI). This method estimates parameters using both observed data and prior knowledge. We follow best practices in sociological research (Nalborczyk et al., 2019) by using a normal distribution N(0, 10) for regression coefficients and a Cauchy distribution C(0,5) for the error term. This choice enhances flexibility and reduces reliance on strict prior assumptions. Overall, this approach helps us control for unobserved factors and address issues like data variability (heteroscedasticity) and interrelated relationships (endogeneity). Findings The findings indicate that FDI can have a detrimental impact on sustainable development in the absence of a strong institutional framework. Conversely, the interaction between FDI and institutional quality (IQ) is favorable, suggesting that enhancing institutional quality has the potential to alleviate or even reverse the negative effects associated with FDI. Furthermore, the country-by-country analysis reveals that the moderating effect of IQ is particularly significant in developing and least developed nations. Practical significance The study outlines several policy implications, emphasizing the critical importance of institutional reform. It advocates for selecting FDI with a high technology focus and underscores the necessity of increasing investments in education and infrastructure. These measures are essential for fostering long-term sustainable development. JEL Classification : F21; O44; Q56; C11; C33; H11