Quality of institutions has been found to positively affect Foreign Direct Investment (FDI) flows. This, however, fails to explain the flow of FDI into countries with poor quality of institutions like India and China. This paper shows that FDI flows in the form of cross border mergers and acquisitions (CBMAs) in India share a negative relationship with the gap in quality of institutions between the host and home countries after controlling for market size and market opportunity in the home and host country and infrastructural facilities in the host country. This suggests that apart from market size and opportunity, CBMAs in India are attracted by poor quality of institutions, particularly corruption and poor governance in the country.
Available at: http://works.bepress.com/poonam_mehra/27/