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Institutions, foreign direct investment, and domestic investment: crowding out or crowding in?

Kristine Farla (), Crombrugghe D.P.I. de and Bart Verspagen

No 54, MERIT Working Papers from United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT)

Abstract: Studies of the relationship between FDI and domestic investment levels reachcontradictory findings. We revisit this empirical relationship and argue that someof the conflicting evidence may be explained by the use of poor proxies for the true underlying variables and by questionable methodological choices. Using more appropriate proxies and statistical models, we conclude that FDI inflows contributepositively to domestic investment levels. We also find weak evidence that goodgovernance, proxied with using the Worldwide Governance Indicators and tworent seeking indicators we built, encourages investment. Theoretical argumentssupport either positive or negative interaction effects of good governance and FDIon investment, invoking either technological spillovers or rent seeking behaviour.We tend to conclude that the negative rent seeking effect is dominant.

Keywords: Institutions and the Macroeconomy; International Investment; Long-term Capital Movements; Globalization: Macroeconomic Impacts; Macroeconomic Analyses of Economic Development, Technological Change, Research and Development, Intellectual Property Rights, Comparative Studies of Countries (search for similar items in EconPapers)
JEL-codes: E02 F21 F62 O11 O30 O57 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2013
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Citations: View citations in EconPapers (10) Track citations by RSS feed

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Journal Article: Institutions, Foreign Direct Investment, and Domestic Investment: Crowding Out or Crowding In? (2016) Downloads
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