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Governance, Foreign Direct Investment and Domestic Welfare

  • Dibyendu Maiti
  • Arijit Mukherjee

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.

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File URL: http://www.nottingham.ac.uk/gep/documents/papers/2010/10-27.pdf
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Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 10/27.

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Handle: RePEc:not:notgep:10/27
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  1. Jota Ishikawa & Hodaka Morita & Hiroshi Mukunoki, 2008. "FDI in Post-Production Services and Product Market Competition," Global COE Hi-Stat Discussion Paper Series gd08-004, Institute of Economic Research, Hitotsubashi University.
  2. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. 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.
  4. Dani Rodrik, 2008. "Second-Best Institutions," NBER Working Papers 14050, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. Banerjee, Abhijit V, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1289-1332, November.
  8. 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.
  9. 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.
  10. 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.
  11. Chris Milner, 2005. "Protection By Tariff Barriers And International Transaction Costs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(1), pages 105-121, 02.
  12. Qiu, Larry D., 2010. "Cross-border mergers and strategic alliances," European Economic Review, Elsevier, vol. 54(6), pages 818-831, August.
  13. Arijit Mukherjee & Uday Bhanu Sinha, 2007. "Welfare-reducing Domestic Cost Reduction," Review of International Economics, Wiley Blackwell, vol. 15(2), pages 294-301, 05.
  14. Chor-Yiu Sin & Wing-Fai Leung, 2001. "Impacts of FDI liberalization on investment inflows," Applied Economics Letters, Taylor & Francis Journals, vol. 8(4), pages 253-256.
  15. 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.
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