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Foreign Direct Investors as Agents of Economic Transition: An Instrumental Variables Analysis

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  • Malesky, Edmund J.

Abstract

Previous empirical analysis has noted a correlation between Foreign Direct Investment (FDI) and economic reformin Eastern Europe and the Former Soviet Union, but has attributed the relationship to investors rewarding countries after reform decisions. Little attention has been paid to the fact that investors' lobbying efforts may actually influence reform choices. This paper finds a positive effect of FDI on reformprogress through a panel analysis of investor influence in 27 transition states (1991–2004). To address endogeneity bias, the exogenous portion of a country's exchange rate movement is used as an instrument in a two-stage procedure. The underlying counterfactual comparison that results from this approach is between two similarly situated countries, but where one country experienced a large shift in the share of FDI in its economy as a result of changes in the international economy and the other did not. Further analysis reveals that the relationship is particularly strong in the manufacturing and service sectors, but does not hold for construction, utilities, or natural resource based projects.

Suggested Citation

  • Malesky, Edmund J., 2009. "Foreign Direct Investors as Agents of Economic Transition: An Instrumental Variables Analysis," Quarterly Journal of Political Science, now publishers, vol. 4(1), pages 59-85, March.
    • Handle: RePEc:now:jlqjps:100.00008068
    DOI: 10.1561/100.00008068
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    Cited by:

    1. Antonietti, Roberto & Mondolo, Jasmine, 2023. "Inward FDI and the quality of domestic institutions: A cross-country panel VAR analysis," Economic Systems, Elsevier, vol. 47(3).
    2. Long, Cheryl & Yang, Jin & Zhang, Jing, 2015. "Institutional Impact of Foreign Direct Investment in China," World Development, Elsevier, vol. 66(C), pages 31-48.
    3. Okara, Assi, 2023. "Does foreign direct investment promote political stability? Evidence from developing economies," Economic Modelling, Elsevier, vol. 123(C).
    4. Dang, Duc Anh, 2013. "How foreign direct investment promote institutional quality: Evidence from Vietnam," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1054-1072.
    5. Igan, Deniz & Lauwers, Alexandre & Puy, Damien, 2022. "Capital Flows and Institutions," CEPR Discussion Papers 17527, C.E.P.R. Discussion Papers.
    6. Assi Okara, 2022. "Building Stronger Economic Institutions in Developing Countries, the Role of FDI," Working Papers hal-03617915, HAL.
    7. Assi Okara, 2018. "Developing inclusive economic institutions in South countries: The role of FDI," Working Papers halshs-01845085, HAL.
    8. Dang, D Anh, 2010. "Trade Liberalization and Institutional Quality: Evidence from Vietnam," MPRA Paper 26346, University Library of Munich, Germany, revised 31 Aug 2010.
    9. David Lektzian & Glen Biglaiser, 2014. "The effect of foreign direct investment on the use and success of US sanctions," Conflict Management and Peace Science, Peace Science Society (International), vol. 31(1), pages 70-93, February.
    10. Roberto Antonietti & Jasmine Mondolo, 2018. "Does inward FDI influence the quality of domestic institutions? A cross-country panel analysis," Papers in Evolutionary Economic Geography (PEEG) 1842, Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography, revised Dec 2018.
    11. Liu, Ruiming & Kang, Yankun & Zhang, Jie, 2021. "Ideological taboos, entry barriers, and FDI attraction: Evidence from China," Journal of Asian Economics, Elsevier, vol. 76(C).
    12. Assi Okara, 2022. "Building Stronger Economic Institutions in Developing Countries, the Role of FDI," CERDI Working papers hal-03617915, HAL.
    13. Fon, Roger Mongong & Filippaios, Fragkiskos & Stoian, Carmen & Lee, Soo Hee, 2021. "Does foreign direct investment promote institutional development in Africa?," International Business Review, Elsevier, vol. 30(4).
    14. Chunyang Pan & William X. Wei & Etayankara Muralidharan & Jia Liao & Bernadette Andreosso-O’Callaghan, 2020. "Does China’s Outward Direct Investment Improve the Institutional Quality of the Belt and Road Countries?," Sustainability, MDPI, vol. 12(1), pages 1-21, January.
    15. Louis Jaeck & Sehjeong Kim, 2018. "FDI Deregulation Versus Labor Market Reform: a Political Economy Approach," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(1), pages 73-89, March.
    16. Assi Okara, 2022. "Does Foreign Direct Investment Promote Political Stability ? Evidence from Developing Economies," CERDI Working papers hal-03617085, HAL.
    17. Assi Okara, 2018. "Developing inclusive economic institutions in South countries: The role of FDI," CERDI Working papers halshs-01845085, HAL.
    18. Yang, Jie & Mohammad, Shoeb, 2023. "Is the cure worse than the disease? The effect of emerging market MNEs on host country corruption," International Business Review, Elsevier, vol. 32(3).

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