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Organized Crime, Foreign Investment and Economic Growth

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  • Silvia Gómez Soler

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Abstract

Latin America has been seen over the years as a violent region. Organized crime has been a major factor contributing to that perception. Crime not only makes daily life more dangerous for citizens of a country, but can even challenge the viability of governments. Crime fighting efforts drain state resources, threaten the delivery of public services, and might have a negative influence on institutional stability and business environment. The purpose of this paper is to extend the empirical framework of Bengoa and Sánchez-Robles (2002) to cover the relationship between organized crime, foreign direct investment (FDI) and growth. Although the relationship between organized crime and FDI is not widely discussed in the literature, it can be argued that there is a very important channel through which this relationship may exist: institutional instability of states and viability of governments. The paper finds that there is no significant correlation between organized crime and FDI flows. The results also show that there is a negative relationship between FDI and growth. The relationship between FDI and growth was explored cautiously because the economic literature suggests that there is a two-way causal link between these two variables. That possible source of endogeneity in the analysis is addressed econometrically in this paper using the Two Stage Least Squares (2SLS) technique. The use of 2SLS was not originally considered by Bengoa and Sánchez-Robles (2002), and therefore it is an additional contribution of this paper to the literature.

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Bibliographic Info

Article provided by UNIVERSIDAD TECNOLÓGICA DE BOLÍVAR in its journal REVISTA ECONOMÍA & REGIÓN.

Volume (Year): (2012)
Issue (Month): ()
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Handle: RePEc:col:000411:010337

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Keywords: Organized crime; foreign direct investment; economic growth; Latin America;

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  1. Bhagwati, Jagdish, 1994. "Free Trade: Old and New Challenges," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(423), pages 231-46, March.
  2. Miguel D. Ramirez, 2010. "Economic and Institutional Determinants of FDI Flows to Latin America: A Panel Study," Working Papers, Trinity College, Department of Economics 1003, Trinity College, Department of Economics.
  3. Luiz de Mello, 1997. "Foreign direct investment in developing countries and growth: A selective survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(1), pages 1-34.
  4. Vittorio Daniele & Ugo Marani, 2008. "Organized Crime and Foreign Direct Investment: The Italian Case," CESifo Working Paper Series 2416, CESifo Group Munich.
  5. Bengoa, Marta & Sanchez-Robles, Blanca, 2003. "Foreign direct investment, economic freedom and growth: new evidence from Latin America," European Journal of Political Economy, Elsevier, vol. 19(3), pages 529-545, September.
  6. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, Elsevier, vol. 45(1), pages 115-135, June.
  7. Boyd, John H. & Smith, Bruce D., 1992. "Intermediation and the equilibrium allocation of investment capital : Implications for economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 30(3), pages 409-432, December.
  8. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521522717.
  9. Jamuna Agarwal, 1980. "Determinants of foreign direct investment: A survey," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 116(4), pages 739-773, December.
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