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Governance, Foreign Direct Investment and Domestic Welfare

Author

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  • Dibyendu Maiti
  • Arijit Mukherjee

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 better governance affects inward FDI and domestic welfare. We find that whether better governance in the domestic country attracts inward FDI depends on the way it affects the costs of the firms. The effect of better governance is ambiguous on domestic welfare and depends on the marginal cost difference between the firms, transportation cost and the extent of cost reduction through better governance. Our analysis reveals a strategic reason for poor governance in the presence of foreign competition.

Suggested Citation

  • Dibyendu Maiti & Arijit Mukherjee, "undated". "Governance, Foreign Direct Investment and Domestic Welfare," Discussion Papers 10/27, University of Nottingham, GEP.
  • Handle: RePEc:not:notgep:10/27
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    References listed on IDEAS

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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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    3. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    4. Dong, Jing & Gou, Yan-nan, 2010. "Corporate governance structure, managerial discretion, and the R&D investment in China," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 180-188, April.
    5. Globerman, Steven & Shapiro, Daniel, 2002. "Global Foreign Direct Investment Flows: The Role of Governance Infrastructure," World Development, Elsevier, vol. 30(11), pages 1899-1919, November.
    6. Fan, Joseph P. H. & Morck, Randall & Lixin Colin Xu & Yeung, Bernard, 2007. "Does"good government"draw foreign capital ? Explaining China's exceptional foreign direct investment inflow," Policy Research Working Paper Series 4206, The World Bank.
    7. Dani Rodrik, 2008. "Second-Best Institutions," American Economic Review, American Economic Association, vol. 98(2), pages 100-104, May.
    8. Abhijit V. Banerjee, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1289-1332.
    9. Azmat Gani, 2007. "Governance and foreign direct investment links: evidence from panel data estimations," Applied Economics Letters, Taylor & Francis Journals, vol. 14(10), pages 753-756.
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    13. Kim, Dong-Hyeon & Lin, Shu-Chin & Suen, Yu-Bo, 2013. "Investment, trade openness and foreign direct investment: Social capability matters," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 56-69.
    14. Reiter, S.L. & Steensma, H. Kevin, 2010. "Human Development and Foreign Direct Investment in Developing Countries: The Influence of FDI Policy and Corruption," World Development, Elsevier, vol. 38(12), pages 1678-1691, December.
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. repec:eee:glofin:v:33:y:2017:i:c:p:1-26 is not listed on IDEAS

    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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