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Institutions, Foreign Direct Investment, and Domestic Investment: Crowding Out or Crowding In?

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  • Farla, Kristine
  • de Crombrugghe, Denis
  • Verspagen, Bart

Abstract

Studies of the relationship between FDI and domestic investment reach contradictory findings. We argue that some of the conflicting evidence may be explained by the use of poor proxies for the theoretical concepts and questionable methodological choices. We review the paper of Morrissey and Udomkerdmonkol published in this journal in 2012. Improvements in the construction of the proxies and refinements in the estimation methodology reverse the finding of Morrissey and Udomkerdmonkol that FDI inflows crowd out domestic investment. Furthermore, there is no strong evidence that “good governance” actually encourages domestic investment.

Suggested Citation

  • Farla, Kristine & de Crombrugghe, Denis & Verspagen, Bart, 2016. "Institutions, Foreign Direct Investment, and Domestic Investment: Crowding Out or Crowding In?," World Development, Elsevier, vol. 88(C), pages 1-9.
  • Handle: RePEc:eee:wdevel:v:88:y:2016:i:c:p:1-9
    DOI: 10.1016/j.worlddev.2014.04.008
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    More about this item

    Keywords

    investment; FDI; governance; technology spillovers; rent seeking; developing countries;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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