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The Quality Of Institutions And Foreign Direct Investment

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Author Info
CHRISTIAN DAUDE
ERNESTO STEIN

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Abstract

Using bilateral foreign direct investment (FDI) stocks around the world, we explore the importance of a wide range of institutional variables as determinants of the location of FDI. While we find that better institutions have overall a positive and economically significant effect on FDI, some institutional aspects matter more than others do. Especially, the unpredictability of laws, regulations and policies, excessive regulatory burden, government instability and lack of commitment play a major role in deterring FDI. For example, the effect of a one standard deviation improvement in the regulatory quality of the host country increases FDI by a factor of around 2. These results are robust to different specifications, estimation methods, and institutional variables. We also present evidence on the significance of institutions as a determinant of FDI over time. Copyright 2007 Blackwell Publishing Ltd..

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0343.2007.00318.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Economics & Politics.

Volume (Year): 19 (2007)
Issue (Month): 3 (November)
Pages: 317-344
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Handle: RePEc:bla:ecopol:v:19:y:2007:i:3:p:317-344

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0954-1985

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  1. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," RES Working Papers 4597, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Stijn Claessens & Neeltje van Horen, 2008. "Location Decisions of Foreign Banks and Institutional Competitive Advantage," DNB Working Papers 172, Netherlands Central Bank, Research Department. [Downloadable!]
  3. Christian Daude & Marcel Fratzscher, 2006. "The pecking order of cross-border investment," Working Paper Series 590, European Central Bank. [Downloadable!]
    Other versions:
  4. Berggren, Niclas & Bergh, Andreas & Bjørnskov, Christian, 2009. "The growth effects of institutional instability," Working Papers 2009:8, Lund University, Department of Economics. [Downloadable!]
    Other versions:
  5. Claessens, Stijn & Van Horen, Neeltje, 2007. "Location decisions of foreign banks and competitive advantage," Policy Research Working Paper Series 4113, The World Bank. [Downloadable!]
  6. Kayam, Saime Suna, 2009. "Home market determinants of FDI outflows from developing and transition economies," MPRA Paper 16781, University Library of Munich, Germany. [Downloadable!]
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