Institutional efficiency, monitoring costs, and the investment share of FDI
AbstractThis paper models and tests the implications of institutional efficiency on the pattern of foreign direct investment (FDI). We posit that domestic agents have a comparative advantage over foreign agents in overcoming some of the obstacles associated with corruption and weak institutions. We model these circumstances in a principal-agent framework with costly ex-post monitoring and enforcement of an ex-ante labor contract. Ex-post monitoring and enforcement costs are assumed to be lower for domestic entrepreneurs than for foreign ones, but foreign producers enjoy a countervailing productivity advantage. Under these asymmetries, multinationals pay higher wages than domestic producers, in line with the insight of efficiency wages and with the evidence about the 'multinationals wage premium.' FDI is also more sensitive to increases in enforcement costs. We then test this prediction for a cross section of developing countries. We use Mauro's (1995) index of institutional efficiency as an indicator of the strength of property rights enforcement within a given country. We compare institutional efficiency levels for a large cross section of countries in 1989 to subsequent FDI flows from 1990 to 1999. We find that institutional efficiency is positively associated with the ratio of subsequent foreign direct investment flows to both gross fixed capital formation and to private investment. This finding is true for both simple cross-sections and for cross-sections weighted by country size.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2003-06.
Date of creation: 2003
Date of revision:
Other versions of this item:
- Joshua Aizenman & Mark M. Spiegel, 2006. "Institutional Efficiency, Monitoring Costs and the Investment Share of FDI," Review of International Economics, Wiley Blackwell, vol. 14(4), pages 683-697, 09.
- Joshua Aizenman & Mark M. Spiegel, 2002. "Institutional Efficiency, Monitoring Costs, and the Investment Share of FDI," NBER Working Papers 9324, National Bureau of Economic Research, Inc.
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- N. Gregory Mankiw & David Romer & David N. Weil, 1992.
"A Contribution to the Empirics of Economic Growth,"
NBER Working Papers
3541, National Bureau of Economic Research, Inc.
- Andrea Fosfuri & Massimo Motta & Thomas Ronde, 1998.
"Foreign direct investments and spillovers through workers' mobility,"
Economics Working Papers
258, Department of Economics and Business, Universitat Pompeu Fabra.
- Fosfuri, Andrea & Motta, Massimo & Ronde, Thomas, 2001. "Foreign direct investment and spillovers through workers' mobility," Journal of International Economics, Elsevier, vol. 53(1), pages 205-222, February.
- Fosfuri, Andrea & Motta, Massimo & Rønde, Thomas, 1999. "Foreign Direct Investment and Spillovers through Workers' Mobility," CEPR Discussion Papers 2194, C.E.P.R. Discussion Papers.
- Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999.
"Excessive FDI Flows Under Asymmetric Information,"
NBER Working Papers
7400, National Bureau of Economic Research, Inc.
- Markusen, James R., 2001.
"Contracts, intellectual property rights, and multinational investment in developing countries,"
Journal of International Economics,
Elsevier, vol. 53(1), pages 189-204, February.
- James R. Markusen, 1998. "Contracts, Intellectual Property Rights, and Multinational Investment in Developing Countries," NBER Working Papers 6448, National Bureau of Economic Research, Inc.
- Okamoto, Yumiko & Sjöholm, Fredrik, 1999. "FDI and the Dynamics of Productivity: Microeconomic Evidence," Working Paper Series in Economics and Finance 348, Stockholm School of Economics.
- Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
- Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
- Barrell, Ray & Pain, Nigel, 1997. "Foreign Direct Investment, Technological Change, and Economic Growth within Europe," Economic Journal, Royal Economic Society, vol. 107(445), pages 1770-86, November.
- James R. Hines, Jr., 1995. "Forbidden Payment: Foreign Bribery and American Business After 1977," NBER Working Papers 5266, National Bureau of Economic Research, Inc.
- Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
- Robert E. Lipsey & Fredrik Sjoholm, 2001. "Foreign Direct Investment and Wages in Indonesian Manufacturing," NBER Working Papers 8299, National Bureau of Economic Research, Inc.
- James R. Markusen, 2004.
"Multinational Firms and the Theory of International Trade,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262633078, December.
- Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
- Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
- Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
- Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
- Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
- Frances Ruane & Xiaoheng Zhang, 2007. "Location Choices of the Pharmaceutical Industry in Europe after 1992," The Institute for International Integration Studies Discussion Paper Series iiisdp220, IIIS.
- Lim, Sung-Hoon, 2005. "Foreign investment impact and incentive: a strategic approach to the relationship between the objectives of foreign investment policy and their promotion," International Business Review, Elsevier, vol. 14(1), pages 61-76, February.
- Marcella Nicolini, 2007. "Institutions and Offshoring Decision," CESifo Working Paper Series 2074, CESifo Group Munich.
- Graf Lambsdorff, Johann, 2005. "Consequences and causes of corruption: What do we know from a cross-section of countries?," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-34-05, University of Passau, Faculty of Business and Economics.
- Duanmu, Jing-Lin, 2011. "The effect of corruption distance and market orientation on the ownership choice of MNEs: Evidence from China," Journal of International Management, Elsevier, vol. 17(2), pages 162-174, June.
- Belkacem Laabas and Walid Abdmoulah, . "Determinants of Arab Intraregional Foreign Direct Investments," API-Working Paper Series 0905, Arab Planning Institute - Kuwait, Information Center.
- Roberto Basile & Luigi Benfratello & Davide Castellani, 2005.
"Attracting Foreign Direct Investments in Europe: are Italian Regions Doomed?,"
Development Working Papers
200, Centro Studi Luca d\'Agliano, University of Milano.
- Roberto Basile & Luigi Benfratello & Davide Castellani, 2005. "Attracting Foreign Direct Investments in Europe: Are Italian Regions Doomed?," Rivista di Politica Economica, SIPI Spa, vol. 95(1), pages 319-, January-F.
- Andreia Olival, 2012. "The influence of Doing Business’ institutional variables in Foreign Direct Investment," GEE Papers 0048, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised Dec 2012.
- Frances Ruane & Xiaoheng Zhang, 2007. "Where do MNEs Expand Production: Location Choices of the Pharmaceutical Industry in Europe after 1992," Papers WP211, Economic and Social Research Institute (ESRI).
- Larrain B., Felipe & Tavares, José, 2007. "Can Openness Deter Corruption? The Role of Foreign Direct Investment," CEPR Discussion Papers 6488, C.E.P.R. Discussion Papers.
- Nikopour, Hesam & Shah Habibullah, Muzafar & Schneider, Friedrich & Law, Siong Hook, 2009. "Foreign Direct Investment and Shadow Economy: A Causality Analysis Using Panel Data," MPRA Paper 14485, University Library of Munich, Germany.
- Alessandro Barattieri, 2011. "Estimating Trade and Investment Flows: Partners and Volumes," Cahiers de recherche 1133, CIRPEE.
- Roberto Basile & Luigi Benfratello & Davide Castellani, 2005. "Attracting Foreign Investments in Europe - are Italian Regions Doomed?," ERSA conference papers ersa05p148, European Regional Science Association.
- Jinjarak, Yothin, 2007. "Foreign direct investment and macroeconomic risk," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 509-519, September.
- Hea-Jung Hyun & Hyuk Hwang Kim, 2007. "The Determinants of Cross-border M&As : the Role of Institutions and Financial Development in Gravity Model," Finance Working Papers 21934, East Asian Bureau of Economic Research.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.