Economic policy uncertainty and foreign direct investment inflow: The role of institutional quality in South Asia region

The article examines the relationship between economic policy uncertainty (EPU) and institutional quality (INQ) and how both factors affect FDI inflow into South Asia between 2000 and 2019. The relationship between the variables was analyzed using the FMOLS and DOLS models while the robustness of analysis was performed by employing GMM model. Demonstrated by the strong negative correlation between FDI inflows and EPU, the findings suggest that policy instability discourages investments essential for sustainable development. In contrast, INQ posits a direct relationship with FDI inflow. Notably, INQ also mitigates the negative effects of policy uncertainty on investment by moderating the relationship between EPU and FDI. These findings have significant policy implications, indicating that an investment climate conducive to sustainable FDI can be established by prioritizing institutional improvement, policy stability, and financial development. This study offers a way to integrate FDI policy with sustainable development goals by examining the moderating effect of INQ on the EPU-FDI nexus. It also contributes to the existing body of literature on environmental transition, opening new research avenues for further exploration.