This paper examines how emerging economies, with a focus on India, transition from being primarily recipients of capital to becoming outward investors. It investigates whether domestic institutional governance, rather than rapid liberalization or extensive investment treaty networks, accounts for the sustained growth of both inward FDI and outward ODI. The study combines a detailed timeline of institutional developments with structural break tests, vector autoregression (VAR), and dynamic panel GMM analysis. This approach tracks the timing, spread, and longevity of reforms like the shift from FERA to FEMA and the digitalization of administration, examining their effect on capital flow patterns. Results show that major turning points in India’s FDI and ODI movements correspond with key governance reforms, such as replacing the Foreign Exchange Regulation Act with the Foreign Exchange Management Act, unifying investment policies, digitizing administration, and renegotiating treaties post-2016. Improvements in governance have a more significant and enduring impact on FDI than macroeconomic factors, while clearer regulation and stronger institutions are vital for boosting ODI. Once domestic institutional capacity is taken into account, the number of investment treaties does not significantly influence capital movements. The paper introduces a “transferability matrix” that highlights effective, low-cost reforms, such as civil penalty systems and digital governance, which other emerging economies can implement. It stresses that integrating into global capital markets depends more on developing solid domestic regulations than on rapid deregulation. The study also advances previous research by (1) combining FDI and ODI within a single institutional framework explaining both flows; (2) moving beyond static, perception-based measures to develop a comprehensive timeline showing how regulatory credibility is built over three decades; and (3) providing empirical proof that credible domestic institutions can replace large treaty networks in ensuring capital mobility.
Singh et al. (2026) studied this question.