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Institution and foreign direct investment (FDI) : survey of the literature

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  • Abdul Karim, Zulkefly

Abstract

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.

Suggested Citation

  • Abdul Karim, Zulkefly, 2008. "Institution and foreign direct investment (FDI) : survey of the literature," MPRA Paper 26977, University Library of Munich, Germany, revised Dec 2008.
  • Handle: RePEc:pra:mprapa:26977
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    File URL: https://mpra.ub.uni-muenchen.de/26977/1/MPRA_paper_26977.pdf
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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, May.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
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    More about this item

    Keywords

    Institution; Foreign Direct Investment (FDI); Econometric Modelling;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F2 - International Economics - - International Factor Movements and International Business
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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