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Political Institutions and Foreign Direct Investment Flows into Developing Countries

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  • dumludag, devrim

Abstract

The major focus of this paper is on the relationship between political, social and economic institutions and Foreign Direct Investment in developing economies. For a decade, the relationship between institutions and Foreign Direct Investment has been receiving growing attention. The link between the quality of institutions and FDI in developing countries, especially in transition economies, has led scholars to focus on the quality of institutions as determinants of FDI in developing countries. This paper explores how social economic and political institutions help explain cross-country variations in Foreign Direct Investment flows by applying Panel data regressions including 67 developing countries for the period 1984-2005. The findings suggest that better perceptions of the quality of institutions have overall a positive and economically significant effect on FDI. Especially, the unpredictability of laws, political and economic instabilities, government instability and high level of corruption play a major role in deterring FDI.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27327.

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Date of creation: 13 Sep 2009
Date of revision: 02 Feb 2010
Handle: RePEc:pra:mprapa:27327

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Keywords: Foreign Direct Investment; Institutions; Developing Economies;

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References

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  1. Felipe Larraín & José Tavares, 2004. "Does Foreign Direct Investment Decrease Corruption?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(123), pages 217-230.
  2. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc.
  3. Smarzynska Javorcik, Beata, 1999. "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights in Transition Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2228, C.E.P.R. Discussion Papers.
  4. Ahmet Faruk AYSAN & Mustapha Kamel NABLI & Marie-Ange VÉGANZON�S-VAROUDAKIS, 2007. "Governance Institutions And Private Investment: An Application To The Middle East And North Africa," The Developing Economies, Institute of Developing Economies, Institute of Developing Economies, vol. 45(3), pages 339-377.
  5. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  6. Adam Przeworski & Fernando Limongi, 1993. "Political Regimes and Economic Growth," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(3), pages 51-69, Summer.
  7. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
  8. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
  9. Keith E. Maskus, 1993. "Intellectual property rights and the Uruguay Round," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q I, pages 10-25.
  10. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  11. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 681-712, August.
  12. Mohsin Habib & Leon Zurawicki, 2002. "Corruption and Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan, vol. 33(2), pages 291-307, June.
  13. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, Elsevier, vol. 23(2), pages 397-415, June.
  14. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, Elsevier, vol. 26(7), pages 1299-1314, July.
  15. Oxley, Joanne E., 1999. "Institutional environment and the mechanisms of governance: the impact of intellectual property protection on the structure of inter-firm alliances," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 38(3), pages 283-309, March.
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