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Post-Manichean Economics: Foreign Investment, State Capacity and Economic Development in Transition Economies

  • Patrick Hamm
  • Lawrence King
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    This paper evaluates the role of foreign direct investment (FDI) in the transition from socialism to capitalism. Fixed-effects panel regressions indicate that FDI and domestic investment have an equal effect on growth in the first year of investment, but over time FDI is associated with greater growth than domestic investment. However, this positive impact of FDI turns out to be contingent upon the presence of a relatively well-functioning state in the host economy; in the absence of such a state, the net effect of FDI on economic development may be negative. All findings are robust in light of instrumental variable estimation, which is used to account for potential endogeneity problems.

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    File URL: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_201-250/WP227.pdf
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    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp227.

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    Date of creation: 2010
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    Handle: RePEc:uma:periwp:wp227
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