Financial and Banking Strategic Studies

The effect of governance quality on foreign direct investment attraction in Iran: Time series analysis with ARDL approach

Document Type : Original Article

Authors

Seyyed Reza Zaeifosadat
Sahar Rafiei

Department of Economics, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

https://doi.org/10.22105/fbs.2025.544433.1171
Abstract
Purpose: This study investigates the impact of governance quality, corruption, and selected macroeconomic variables on Foreign Direct Investment (FDI), with a particular focus on Iran. The significance of this research lies in the fact that institutional quality and corruption control are critical determinants of foreign investment inflows and play a vital role in financial development and long-term economic growth. To analyze the data, the Autoregressive Distributed Lag (ARDL) model was employed over the study period. Furthermore, diagnostic tests, including CUSUM and CUSUMSQ, confirmed the stability of the estimated coefficients, indicating that the model's short- and long-run relationships are robust.
Methodology: To analyze the data, the ARDL model was used in the study period.
Findings: The empirical results reveal that the Exchange Rate and the lagged effect of FDI exert a positive, statistically significant impact on FDI inflows. In contrast, inflation and weak governance indicators negatively affect foreign investment attraction, while the impact of government expenditure was found to be insignificant. Moreover, the Corruption Perceptions Index (CPI) highlights the persistence of institutional challenges in Iran, which continue to pose a serious barrier to sustainable FDI inflows. Overall, the findings emphasize that improving governance and reducing corruption are prerequisites for financial development and for strengthening FDI inflows in Iran.
Originality/Value: By integrating institutional quality indicators, corruption, and macroeconomic stability into a unified econometric framework for Iran, this study provides novel scientific value. While much of the existing literature has largely overlooked institutional dimensions, this research offers fresh evidence that structural reforms aimed at enhancing transparency and governance efficiency can significantly improve Iran's capacity to attract foreign direct investment.

Keywords

Iran
Foreign direct investment
Governance
Economic growth
Corruption

Subjects

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Financial and Banking Strategic Studies
Volume 3, Issue 2
Summer 2025
Pages 135-147

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