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The Impact of Transparency on Foreign Direct Investment

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  • Drabek, Z.
  • Payne, W.
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    Abstract

    Non-transparency is a term given in this paper to a set of government policies that increase the risk and uncertainty faced by economic actors foreign investors. This increase in risk and uncertainty stems from the presence of bribery and corruption, unstable economic policies, weak and poorly enforced property rights, and inefficient government institutions. Our empirical analysis shows that the degree of non-transparency is an important factor in a country's attractiveness to foreign investors. High levels of non-transparency can greatly retard the amount of foreign investment that a country might otherwise expect. The simulation exercise presented in the statistical part of this paper reveals that on average a country could expect 40 percent increase in FDI from a one point increase in their transparency ranking. Pari passu, non-transparent policies translate into lower levels of FDI and hence lower levels of welfare and efficiency in the host country's economy. A nation that takes steps to increase the degree of transparency in its policies and institutions could expect significant increases in the level of foreign investment into their country. This increased investment translates into more resources, which in turn increases social welfare and economic efficiency.

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    Bibliographic Info

    Paper provided by World Trade Organization. Economic Research and Analysis Division (ERAD) in its series Economic Research and Analysis Division (ERAD) with number 99-02.

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    Length: 34 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:fth:wtoera:99-02

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    Postal: World Trade Organization. Economic Research and Analysis Division (ERAD). 54 Rue de Lausanne 1211 Geneva 21. Switzerland.
    Phone: + 41 (0)22 739 5111
    Fax: + 41 (0) 22 731 4206
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    Web page: http://www.wto.org/english/res_e/reser_e/reser_e.htm
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    Related research

    Keywords: INVESTMENTS ; INTERNATIONAL AFFAIRS ; MANAGEMENT ; BUSINESS ORGANIZATION;

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    Cited by:
    1. Fathi Ali & Norbert Fiess & Ronald MacDonald, 2008. "Do Institutions Matter for Foreign Direct Investment?," Working Papers 2008_26, Business School - Economics, University of Glasgow.
    2. Habib, M. & Zurawicki, L., 2001. "Country-level investments and the effect of corruption -- some empirical evidence," International Business Review, Elsevier, vol. 10(6), pages 687-700, December.
    3. Morisset, Jacques, 2000. "Foreign direct investment in Africa : policies also matter," Policy Research Working Paper Series 2481, The World Bank.
    4. Bitzenis, Aristidis & Tsitouras, Antonis & Vlachos, Vasileios A., 2009. "Decisive FDI obstacles as an explanatory reason for limited FDI inflows in an EMU member state: The case of Greece," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 691-704, August.
    5. Klein, Michael & Aaron, Carl & Hadjimichael, Bita, 2001. "Foreign direct investment and poverty reduction," Policy Research Working Paper Series 2613, The World Bank.
    6. Normaz Ismail, 2009. "The Determinant of Foreign Direct Investment in ASEAN: A Semi-Gravity Approach," Transition Studies Review, Springer, vol. 16(3), pages 710-722, October.
    7. Joel S. Hellman & Geraint Jones & Daniel Kaufmann, 2003. "Far From Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies?," Development and Comp Systems 0308006, EconWPA.

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