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Institutional Efficiency, Monitoring Costs and the Investment Share of FDI

  • Joshua Aizenman
  • Mark M. Spiegel

This paper models and tests the implications of institutional efficiency on the pattern of 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. Under these circumstances, FDI is more sensitive to increases in enforcement costs. We then test this prediction, comparing institutional efficiency levels for a large cross-section of countries in 1989 to subsequent FDI flows through the period of 1990-99, finding 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. Copyright � 2006 The Authors; Journal compilation � 2006 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 14 (2006)
Issue (Month): 4 (09)
Pages: 683-697

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Handle: RePEc:bla:reviec:v:14:y:2006:i:4:p:683-697
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  1. 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.
  2. 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.
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  13. 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.
  14. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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