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Political Regime, Private Investment, and Foreign Direct Investment in Developing Countries

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Author Info
Udomkerdmongkol, Manop
Morrissey, Oliver
Abstract

This paper uses annual aggregate data for 36 low or middle income countries covering the period 1995-2001 to investigate the effect of FDI on private investment. It also explores if the relationship between FDI and private investment is influenced by the nature of the political regime, using four governance measures (voice and accountability, regulatory quality, political stability, and control of corruption) to distinguish between ?market-friendly? (high or good governance values) and ?market-unfriendly? (low governance) regimes. The results, which hold for all of the governance measures, show that private investment is more important than FDI in terms of the contribution to total investment, and that FDI inflows and private investment are higher in countries with good governance. Interestingly, the findings demonstrate that FDI tends to displace domestic private investment, and this ?crowding out? effect is greater in countries with good governance.

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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Papers with number UNU-WIDER Research Paper RP2008/109.

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Length: 22 pages
Date of creation: 2008
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Handle: RePEc:unu:wpaper:rp2008-109

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Keywords: FDI; investment sources; finance;

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  7. David Deok-Ki Kim & Jung-Soo Seo, 2003. "Does FDI inflow crowd out domestic investment in Korea?," Journal of Economic Studies, Emerald Group Publishing, vol. 30(6), pages 605-622, October. [Downloadable!] (restricted)
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  10. Li, Quan & Resnick, Adam, 2003. "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries," International Organization, Cambridge University Press, vol. 57(01), pages 175-211, February. [Downloadable!]
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  13. Oshikoya, Temitope W, 1994. "Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 42(3), pages 573-96, April.
  14. Jan Mišun, Vladimr Tomšk, 2002. "Does Foreign Direct Investment Crowd in or Crowd out Domestic Investment?," Eastern European Economics, M.E. Sharpe, Inc., vol. 40(2), pages 38-56, March. [Downloadable!] (restricted)
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  16. Manuel R. AGOSIN & Ricardo MAYER, 2000. "Foreign Investment In Developing Countries, Does It Crowd In Domestic Investment?," UNCTAD Discussion Papers 146, United Nations Conference on Trade and Development. [Downloadable!]
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