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Institutional Efficiency, Monitoring Costs and the Investment Share of FDI

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  • Joshua Aizenman
  • Mark M. Spiegel

Abstract

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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Find related papers by JEL classification:
  • 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

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  1. James R. Hines, Jr., 1995. "Forbidden Payment: Foreign Bribery and American Business After 1977," NBER Working Papers 5266, National Bureau of Economic Research, Inc.
  2. Razin, A. & Sadka, E. & Yuen, C.-W., 1999. "Excessive FDI Flows under Asymmetric Information," Papers 27-99, Tel Aviv.
  3. 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.
  4. 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.
  5. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Okamoto, Yumiko & Sjöholm, Fredrik, 1999. "FDI and the Dynamics of Productivity: Microeconomic Evidence," SSE/EFI Working Paper Series in Economics and Finance 348, Stockholm School of Economics.
  9. 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.
  10. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  11. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  12. 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.
  13. Robert E. Lipsey & Fredrik Sjoholm, 2001. "Foreign Direct Investment and Wages in Indonesian Manufacturing," NBER Working Papers 8299, National Bureau of Economic Research, Inc.
  14. 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.
  15. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
  16. 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.
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Cited by:

  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. Alessandro Barattieri, 2011. "Estimating Trade and Investment Flows: Partners and Volumes," Cahiers de recherche 1133, CIRPEE.
  6. 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.
  7. 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.
  8. Maria Teresa Costa-Campi & Jordi Paniagua & Elisa Trujillo-Baute, 2015. "Are energy market integrations a green light for FDI?," Working Papers 2015/18, Institut d'Economia de Barcelona (IEB).
  9. Roberto Basile & Luigi Benfratello & Davide Castellani, 2005. "Attracting Foreign Investments in Europe - are Italian Regions Doomed?," ERSA conference papers ersa05p148, European Regional Science Association.
  10. Belkacem Laabas and Walid Abdmoulah, . "Determinants of Arab Intraregional Foreign Direct Investments," API-Working Paper Series 0905, Arab Planning Institute - Kuwait, Information Center.
  11. Agarwal,Sumit & Morais,Bernardo & Ruiz Ortega,Claudia & Zhang,Jian, 2016. "The political economy of bank lending : evidence from an emerging market," Policy Research Working Paper Series 7577, The World Bank.
  12. 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.
  13. Jinjarak, Yothin, 2007. "Foreign direct investment and macroeconomic risk," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 509-519, September.
  14. 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.
  15. Marcella Nicolini, 2007. "Institutions and Offshoring Decision," CESifo Working Paper Series 2074, CESifo Group Munich.
  16. 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.
  17. 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.

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