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Governance, Foreign Direct Investment and Domestic Welfare

Author

Listed:
  • 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, 2010. "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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    2. 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.
    3. Ang, James & Knill, April & Mauck, Nathan, 2017. "Cross-border opportunity sets: An international empirical study based on ownership types," Global Finance Journal, Elsevier, vol. 33(C), pages 1-26.
    4. 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.
    5. 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.
    6. 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.
    7. Yosra Saidi & Anis Ochi & Samir Maktouf, 2023. "FDI inflows, economic growth, and governance quality trilogy in developing countries: A panel VAR analysis," Bulletin of Economic Research, Wiley Blackwell, vol. 75(2), pages 426-449, April.
    8. Chi‐Chur Chao & Leonard F. S. Wang, 2022. "Corporate governance, firm dynamics, and wage inequality," Manchester School, University of Manchester, vol. 90(3), pages 341-353, June.

    More about this item

    Keywords

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    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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