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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.

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  • Joshua Aizenman & Mark M. Spiegel, 2006. "Institutional Efficiency, Monitoring Costs and the Investment Share of FDI," Review of International Economics, Wiley Blackwell, vol. 14(4), pages 683-697, September.
    • Handle: RePEc:bla:reviec:v:14:y:2006:i:4:p:683-697
    DOI: 10.1111/j.1467-9396.2006.00595.x
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    More about this item

    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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