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Business start-up regulations and the complementarity between foreign and domestic investment

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  • Jonathan Munemo

Abstract

This paper shows that the complementarity between foreign direct investment (FDI) and domestic investment significantly depends on regulations required to start a new domestically owned business in host economies. It finds evidence that FDI crowds out domestic investment in countries with entry regulation cost above a certain level, and many of these countries are in the bottom quartile of GDP per capita. Reforms in business start-up regulations can therefore play a critical role in enhancing the complementarity between foreign and domestic investment and thereby increase entrepreneurship and economic growth in low-income countries. The analysis takes into account other significant factors which affect domestic investment such as the cost of capital, government’s economic growth track record, institutional quality, and market size. Copyright Kiel Institute 2014

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  • Jonathan Munemo, 2014. "Business start-up regulations and the complementarity between foreign and domestic investment," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(4), pages 745-761, November.
    • Handle: RePEc:spr:weltar:v:150:y:2014:i:4:p:745-761
    DOI: 10.1007/s10290-014-0189-2
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    Cited by:

    1. Nguyen Van Bon, 2021. "Does FDI inflow crowd in private investment? Empirical evidence for the Southeast region of Vietnam from the panel quantile regression approach," HO CHI MINH CITY OPEN UNIVERSITY JOURNAL OF SCIENCE - ECONOMICS AND BUSINESS ADMINISTRATION, HO CHI MINH CITY OPEN UNIVERSITY JOURNAL OF SCIENCE, HO CHI MINH CITY OPEN UNIVERSITY, vol. 11(2), pages 127-136.
    2. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    3. Sara Amoroso & Bettina Müller, 2018. "The short-run effects of knowledge intensive greenfield FDI on new domestic entry," The Journal of Technology Transfer, Springer, vol. 43(3), pages 815-836, June.
    4. Patrícia Bernardes & Petr Iakovlevitch Ekel & Sérgio Fernando Loureiro Rezende & Joel Gomes Pereira Júnior & Angélica Cidália Gouveia Santos & Maurício Andrade Rodrigues Costa & Rafael Lopes Carvalhai, 2022. "Cost of doing business index in Latin America," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(4), pages 2233-2252, August.
    5. Ivanović, Igor, 2015. "Impact of foreign direct investment (FDI) on domestic investment in Republic of Croatia," MPRA Paper 70076, University Library of Munich, Germany.
    6. World Bank Group, 2017. "Global Economic Prospects, January 2017," World Bank Publications - Books, The World Bank Group, number 25823, December.
    7. Dobdinga Cletus Fonchamnyo & Gildas Dohba Dinga & Vahsegmi Carolle Ngum, 2021. "Revisiting the nexus between domestic investment, foreign direct investment and external debt in SSA countries: PMG‐ARDL approach," African Development Review, African Development Bank, vol. 33(3), pages 479-491, September.
    8. Alessia A. Amighini & Margaret S. McMillan & Marco Sanfilippo, 2017. "FDI and Capital Formation in Developing Economies: New Evidence from Industry-level Data," NBER Working Papers 23049, National Bureau of Economic Research, Inc.
    9. Moritz Böhmecke-Schwafert & Knut Blind, 2023. "The trade effects of product market regulation in global value chains: evidence from OECD and BRICS countries between 2000 and 2015," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 50(2), pages 441-479, May.

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    More about this item

    Keywords

    Foreign direct investment; Entry regulation; Domestic investment; Crowding out; F2; O1; O4;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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