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Governance, foreign direct investment and domestic welfare

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  • Maiti, Dibyendu
  • Mukherjee, Arijit

Abstract

The issue of economic governance is highly discussed pertaining to the question of industrialisation of a country, but the literature on trade and foreign direct investment (FDI) hardly pays attention to this aspect. We develop a simple model to show how good economic governance in the domestic country, reducing domestic marketing and distribution costs, affects inward FDI and domestic welfare. Whether good governance in the domestic country attracts FDI depends on the way it affects the marketing and distribution costs. The effect of good governance is ambiguous on domestic welfare and depends on the cost difference between the firms, international transportation cost and the extent of cost reduction. Our analysis reveals strategic reasons for poor governance in some situations in the presence of foreign competition.

Suggested Citation

  • Maiti, Dibyendu & Mukherjee, Arijit, 2013. "Governance, foreign direct investment and domestic welfare," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 406-415.
  • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:406-415
    DOI: 10.1016/j.iref.2012.12.001
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    1. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Cited by:

    1. Leonard Wang & Tien-Der Han, 2015. "Better governance matters optimal privatization policy," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 189-206, December.
    2. repec:eee:glofin:v:33:y:2017:i:c:p:1-26 is not listed on IDEAS
    3. Gani, Azmat & Scrimgeour, Frank, 2016. "New Zealand's trade with Asia and the role of good governance," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 36-53.
    4. Chaudhuri, Sarbajit, 2014. "Foreign capital, non-traded goods and welfare in a developing economy in the presence of externalities," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 249-262.
    5. Ravi Batra & Hamid Beladi, 2013. "Foreign Capital and Urban Congestion in Emerging Markets," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 676-684, November.

    More about this item

    Keywords

    Foreign direct investment; Governance; Welfare;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H0 - Public Economics - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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