Rule of Law score vs FDI per capita (log scale). Each dot is a country, colored by income group. Click to pin labels (max 5).
FDI follows institutions. A one-standard-deviation improvement in Rule of Law is associated with 1.69x more FDI across all countries -- but 7.5x for low-income and 13.2x for lower-middle-income countries, where the marginal return to institutional improvement is highest.
This pattern has profound policy implications. For countries at the bottom of the institutional quality spectrum, even modest reforms -- a functioning commercial court, enforceable contracts, predictable regulation -- can unlock disproportionate capital flows. The scatter plot reveals why: investors are not seeking perfection. They are seeking the minimum viable institutional environment that makes their capital safe. Moving from Rule of Law -1.5 to -0.5 is worth far more in FDI terms than moving from +1.0 to +2.0.
The income-group coloring reveals another pattern: high-income countries cluster in the upper right (high RoL, high FDI), but there is enormous variation within income groups. Singapore attracts 26x more FDI per capita than Japan despite similar rule-of-law scores. Rwanda attracts 4x more than the DRC. The difference is not just institutions but the signal that reform sends to global capital markets.