EconPapers    
Economics at your fingertips  
 

Does a stronger system of law and order constrain the effects of foreign direct investment on government size?

Nadine McCloud, Michael S. Delgado and Chanit'a Holmes

European Journal of Political Economy, 2018, vol. 55, issue C, 258-283

Abstract: The flow of foreign direct investment (FDI) has increased the challenges governments face in carrying out their fiscal responsibilities. A country's system of law and order enables or constrains the implementation of government policies, and consequently influences whether the size of government responds to changes in FDI inflows and outflows. We test this hypothesis by fitting a semiparametric model of government consumption to a panel of developed and developing countries with within-country variation. Over a short data frequency, the average compensating response of governments in developing countries to an increase in FDI inflows is larger by a factor of five than that of developed countries. These significant level effects of FDI inflows are driven by law and order and are adjusted for differences in per capita income across countries. The larger the compensating response of a government, the bigger is the constraining effect of a stronger system of law and order. The efficiency hypothesis seems empirically valid for developing countries with a moderate system of law and order. Over a long data frequency, we find a strong (negative) link between FDI inflows and government consumption, and increases in law and order weaken this link. For both data frequencies, FDI outflows have no level effect on government consumption, whereas the empirical regularity of strong and robust inertia in government consumption exists in all countries.

Keywords: Foreign direct investment; Government consumption; Law and order; Parameter heterogeneity; Compensating and efficiency hypotheses; Semiparametric analysis (search for similar items in EconPapers)
JEL-codes: C14 C26 E02 E62 F21 H54 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0176268016303299
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:55:y:2018:i:c:p:258-283

Access Statistics for this article

European Journal of Political Economy is currently edited by J. De Haan, A. L. Hillman and H. W. Ursprung

More articles in European Journal of Political Economy from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-01-19
Handle: RePEc:eee:poleco:v:55:y:2018:i:c:p:258-283