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Foreign direct investment and the domestic capital stock: the good–bad role of higher institutional quality

Author

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  • Michael S. Delgado

    (Purdue University)

  • Nadine McCloud

    (University of the West Indies at Mona)

Abstract

We investigate heterogeneity between foreign direct investment (FDI) and domestic investment induced by corruption and human capital. Controlling for corruption and human capital, inbound FDI has significant, heterogeneous complementarity effects on domestic investment; the effect of outbound FDI on domestic investment is fluid: substitution and complementarity exist, and change direction over time. The fluid effects of outbound FDI oppose the popular dollar-for-dollar hypothesis. Although lower corruption and higher human capital strengthen, weaken, or do not change the degree of these FDI effects, the data are inconsistent with the hypothesis of a global optimum for corruption or human capital. Corruption and human capital do not appear to be binding constraints in all countries. The role of institutional quality appears consistent with the prediction of the General Theory of Second Best.

Suggested Citation

  • Michael S. Delgado & Nadine McCloud, 2017. "Foreign direct investment and the domestic capital stock: the good–bad role of higher institutional quality," Empirical Economics, Springer, vol. 53(4), pages 1587-1637, December.
    • Handle: RePEc:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1173-6
    DOI: 10.1007/s00181-016-1173-6
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    3. Yixing Yang & Md. Qamruzzaman & Mohd Ziaur Rehman & Salma Karim, 2021. "Do Tourism and Institutional Quality Asymmetrically Effects on FDI Sustainability in BIMSTEC Countries: An Application of ARDL, CS-ARDL, NARDL, and Asymmetric Causality Test," Sustainability, MDPI, vol. 13(17), pages 1-29, September.
    4. Si Xie & Tianshu Li & Ke Cao, 2023. "Analysis of the Impact of Carbon Emission Control on Urban Economic Indicators based on the Concept of Green Economy under Sustainable Development," Sustainability, MDPI, vol. 15(13), pages 1-22, June.
    5. Nadine McCloud, 2022. "Does domestic investment respond to inflation targeting? A synthetic control investigation," International Economics, CEPII research center, issue 169, pages 98-134.
    6. Viacheslav Iurkov & Gabriel R G Benito, 2020. "Change in domestic network centrality, uncertainty, and the foreign divestment decisions of firms," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(5), pages 788-812, July.
    7. Mori Kogid & Jaratin Lily & Rozilee Asid & James M. Alin & Dullah Mulok, 2022. "Volatility spillover and dynamic co-movement of foreign direct investment between Malaysia and China and developed countries," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(1), pages 131-148, February.

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    More about this item

    Keywords

    Corruption; Domestic investment; Foreign direct investment; Schooling; Second best; Semiparametric estimation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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