Growth Effect of Foreign Direct Investment in Developing Economies: The Role of Institutional Quality

This paper investigates the effect of foreign direct investment (FDI) on economic growth conditional on the institutional quality of host countries. We first develop several theoretical arguments to show that institutional heterogeneity may be an explanation for the mixed results of previous empiric...

Full description

Saved in:
Bibliographic Details
Published in:World economy 2017-04, Vol.40 (4), p.715-742
Main Authors: Jude, Cristina, Levieuge, Gregory
Format: Article
Language:English
Subjects:
Developing countries
Economic development
Economic models
Economics and Finance
Foreign investment
Heterogeneity
Humanities and Social Sciences
LDCs
Quality
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper investigates the effect of foreign direct investment (FDI) on economic growth conditional on the institutional quality of host countries. We first develop several theoretical arguments to show that institutional heterogeneity may be an explanation for the mixed results of previous empirical studies. Second, using a panel smooth regression model on a large sample of developing countries, we show that FDI has a positive effect on growth only beyond a certain threshold of institutional quality. To benefit from FDI‐led growth, institutional reforms should thus precede FDI attraction policies. Additionally, some reforms seem to promote faster marginal effects of FDI, while institutional complementarities may lead to an incremental effect on growth.
ISSN:0378-5920
1467-9701
DOI:10.1111/twec.12402