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Growth effect of FDI in developing economies: The role of institutional quality

Cristina Jude () and Grégory Levieuge ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the effect of FDI on economic growth conditional on the institutional quality of host countries. We consider institutional heterogeneity to be an explanation for the mixed results of previous empirical studies and we develop several arguments to show that institutional quality modulates the intensity of FDI impact on growth. Using a comprehensive data set for institutional quality, we test this hypothesis on a sample of 94 developing countries over the period 1984-2009. The use of Panel Smooth Transition Regression (PSTR) allows us to identify both the heterogeneity and the threshold of institutional quality that influence the FDI growth effect. These results have significant implications for policy sequencing in developing countries. In order to benefit from FDI-led growth, the improvement of the institutional framework should precede FDI attraction policies. While some features of institutional quality have an immediate effect on fostering FDI-led growth, others need a consistent accumulation of efforts, therefore challenging the effectiveness of institutional reforms in developing countries.

Keywords: FDI; growth; heterogeneity; institutional quality; PSTR; Developing economies (search for similar items in EconPapers)
JEL-codes: C34 F21 F43 O16 (search for similar items in EconPapers)
Date: 2013-08-26
New Economics Papers: this item is included in nep-cse, nep-cwa, nep-dev, nep-fdg and nep-int
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Related works:
Working Paper: Growth effect of FDI in developing economies: The role of institutional quality (2015) Downloads
Working Paper: Growth Effect of FDI in Developing Economies: the Role of Institutional Quality (2014) Downloads
Working Paper: Growth Effect of FDI in Developing Economies: the Role of Institutional Quality (2013) Downloads
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