Institution and foreign direct investment (FDI) : survey of the literature
In this paper, I survey the current literature relating to the relationship between the institution and foreign direct investment (FDI). In doing so, I have comprehensively analyzed two most recent paper written by Busse and Hefeker (2007) and Daude and Stein (2007). Both articles have used a difference econometric methodology, explanatory variables and institutions measurement in order to link whether institution variables matter or not in influencing the behaviour of foreign investors, in particular from Multinational Enterprise (MNE’s). Based on these papers, they found that a better institution in term of government stability, investment profile, internal and external conflicts, law and order, democratic accountability and bureaucratic quality are pre-requisite for promoting the investment from MNE’s. Therefore, the policy makers have to maintain a sound institution in order to take advantage the inflow of foreign investment. However, I argued that a sound institution is an inadequately in explaining the behaviour of MNE’s. A good interaction between institutional variables and other macro variables such as a well-developed financial system, favourable growth performance, high trade openness, excellent infrastructure development, low country risk as well as an attractive fiscal and monetary incentive are also vital in stimulating the inflow of FDI to the host countries.
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|Date of revision:||Dec 2008|
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- Busse, Matthias & Hefeker, Carsten, 2007.
"Political risk, institutions and foreign direct investment,"
European Journal of Political Economy,
Elsevier, vol. 23(2), pages 397-415, June.
- Hefeker, Carsten & Busse, Matthias, 2005. "Political Risk, Institutions and Foreign Direct Investment," HWWA Discussion Papers 315, Hamburg Institute of International Economics (HWWA).
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Pesaran, M.H. & Smith, R., 1992.
"Estimating Long-Run Relationships From Dynamic Heterogeneous Panels,"
Cambridge Working Papers in Economics
9215, Faculty of Economics, University of Cambridge.
- Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
- Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
- Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2007.
"Institutional Determinants of Foreign Direct Investment,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2007. "Institutional Determinants of Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 30(5), pages 764-782, 05.
- Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2005. "Institutional Determinants of Foreign Direct Investment," Working Papers 2005-05, CEPII research center.
- Aymo Brunetti & Beatrice Weder, 1998. "Investment and institutional uncertainty: A comparative study of different uncertainty measures," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(3), pages 513-533, September.
- Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
- Holger Schmieding, 1993. "From plan to market: On the nature of the transformation crisis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 129(2), pages 216-253, June.
- David L. Carr & James R. Markusen & Keith E. Maskus, 2001.
"Estimating the Knowledge-Capital Model of the Multinational Enterprise,"
American Economic Review,
American Economic Association, vol. 91(3), pages 693-708, June.
- David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
- Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
- Christian Daude & Ernesto Stein, 2007. "The Quality Of Institutions And Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 19(3), pages 317-344, November.
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