IDEAS home Printed from https://ideas.repec.org/a/cvv/journ5/v9y2022i2p56-75.html

Impact of institution building and foreign direct investment on economic growth

Author

Listed:
  • Takaharu ISHII

    (Japan)

Abstract

This study tests the hypothesis that institution building leads to FDI inflows and promotes economic growth rates. We also compare the estimation results when multiple institutional variables are used, and examine whether broad legal and institutional stability is important and whether specific articles are important for FDI inflows. The results of the verification revealed that (1) institution building leads to FDI inflows and promotes economic growth rates, (2) robust results are obtained regardless of multiple legal and institutional indicators, and (3) among the legal systems, the specific deregulation of capital account regulations, laws affect FDI inflows and economic growth, and (4) the combination of an increase in broad-based legal system stability and the relaxation of capital account regulations together will promote FDI and economic growth. In other words, it is confirmed that investor and public confidence in the government and judiciary for the stability of the extensive legal system, including the protection of property rights, will bring about an inflow of foreign direct investment. (5) While FDI inflows are critical to economic growth, the study found that among institutional factors, improvements in legal and institutional capacity, in particular, are highly effective in bringing about economic growth through a rise in FDI. The importance of both capital account regulations, which are indicators that have a direct impact on foreign investors considering FDI, and legal system indicators, which show the degree of legal compliance by domestic residents, indicates that relaxing capital account regulations alone is not enough to fully promote FDI inflows. It means that the degree of legal compliance of domestic residents must be high to further promote FDI inflows. In other words, FDI inflows will bring economic growth through the maturation of the rule of law.

Suggested Citation

  • Takaharu ISHII, 2022. "Impact of institution building and foreign direct investment on economic growth," Journal of Economics Library, EconSciences Journals, vol. 9(2), pages 56-75, June.
    • Handle: RePEc:cvv:journ5:v:9:y:2022:i:2:p:56-75
    as

    Download full text from publisher

    File URL: https://journals.econsciences.com/index.php/JEL/article/view/2315/2320
    Download Restriction: no
    File URL: https://journals.econsciences.com/index.php/JEL/article/view/2315
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    2. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    3. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
    4. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    5. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrea Asoni, 2008. "Protection Of Property Rights And Growth As Political Equilibria," Journal of Economic Surveys, Wiley Blackwell, vol. 22(5), pages 953-987, December.
    2. Mustapha Kamel Nabli, 2007. "Breaking the Barriers to Higher Economic Growth : Better Governance and Deeper Reforms in the Middle East and North Africa," World Bank Publications - Books, The World Bank Group, number 6914, April.
    3. Rasha Hashim Osman & Constantinos Alexiou & Persefoni Tsaliki, 2012. "The role of institutions in economic development: Evidence from 27 Sub-Saharan African countries," International Journal of Social Economics, Emerald Group Publishing, vol. 39(2), pages 142-160, January.
    4. Puruweti Siyakiya & Muammer Mustafa Erdoğdu & Ebru Çağlayan Akay, 2023. "Impact of industrialisation on economic development in selected African and Asian economies: the role of institutional quality and investment climate," SN Business & Economics, Springer, vol. 3(12), pages 1-32, December.
    5. Mohsen Bahmani-Oskooee & Shady Kholdy & Ahmad Sohrabian, 2013. "Do MNCs spur financial markets in corrupt host countries?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(2), pages 308-317, April.
    6. Holger Strulik, 2008. "Social composition, social conflict and economic development," Economic Journal, Royal Economic Society, vol. 118(530), pages 1145-1170, July.
    7. Dalila Chenaf-Nicet, 2020. "Dynamics of Structural Change in a Globalized World: What Is the Role Played by Institutions in the Case of Sub-Saharan African Countries?," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 32(4), pages 998-1037, September.
    8. Ines Lindner & Holger Strulik, 2008. "Social Fractionalization, Endogenous Appropriation Norms, and Economic Development," Economica, London School of Economics and Political Science, vol. 75(298), pages 244-258, May.
    9. Marie-Ange VEGANZONES-VAROUDAKIS & NABLI & Ahmet Faruk AYSAN, 2006. "Governance and Private Investment in the Middle East and North Africa," Working Papers 200627, CERDI.
    10. Ridha Chkoundali & Houda Haffoudhi & Houda Abdenneji, 2011. "Institutional Sphere Contribution to Human Development: An Institutional Approach," Working Papers 629, Economic Research Forum, revised 09 Jan 2011.
    11. Asoni, Andrea, 2008. "Protection of Property Rights and Growth as Political Equilibria," Working Paper Series 737, Research Institute of Industrial Economics.
    12. 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, revised Dec 2012.
    13. Mishkin, Frederic S., 2009. "Globalization and financial development," Journal of Development Economics, Elsevier, vol. 89(2), pages 164-169, July.
    14. Bogdan Dima & Stefana Maria Dima & Oana-Ramona Lobont, 2013. "New empirical evidence of the linkages between governance and economic output in the European Union," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(1), pages 68-89, March.
    15. Marie-Ange Véganzonès-Varoudakis & A. Aysan, 2007. "How Do Political and Governance Institutions Affect Private Investment Decisions? An Application to the Middle East and North Africa," Post-Print hal-00229728, HAL.
    16. Young Eun Kim & Norman V. Loayza, 2019. "Productivity Growth: Patterns and Determinants across the World," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 42(84), pages 36-93.
    17. Ahmet Faruk AYSAN & Mustapha Kamel NABLI & Marie‐Ange VÉGANZONÈS‐VAROUDAKIS, 2007. "Governance Institutions And Private Investment: An Application To The Middle East And North Africa," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 339-377, September.
    18. Marta Marson & Matteo Migheli & Donatella Saccone, 2021. "New evidence on the link between ethnic fractionalization and economic freedom," Economics of Governance, Springer, vol. 22(3), pages 257-292, September.
    19. Hayat, Arshad, 2016. "Foreign Direct Investment, Institutional Framework and Economic Growth," MPRA Paper 74563, University Library of Munich, Germany.
    20. Fetzer, James J. & Rivera, Sandra A., 2005. "Modeling Modifications in Rules of Origin: A Partial Equilibrium Approach," Conference papers 331372, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • F30 - International Economics - - International Finance - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cvv:journ5:v:9:y:2022:i:2:p:56-75. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bilal KARGI (email available below). General contact details of provider: https://journals.econsciences.com/index.php/JEL .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.