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Institutions, foreign direct investment, and domestic investment : crowding out or crowding in?

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  • Farla K.
  • Crombrugghe D.P.I. de
  • Verspagen B.

    (UNU-MERIT)

Abstract

Studies of the relationship between FDI and domestic investment levels reachcontradictory findings. We revisit this empirical relationship and argue that someof the conflicting evidence may be explained by the use of poor proxies for the true underlying variables and by questionable methodological choices. Using more appropriate proxies and statistical models, we conclude that FDI inflows contributepositively to domestic investment levels. We also find weak evidence that goodgovernance, proxied with using the Worldwide Governance Indicators and tworent seeking indicators we built, encourages investment. Theoretical argumentssupport either positive or negative interaction effects of good governance and FDIon investment, invoking either technological spillovers or rent seeking behaviour.We tend to conclude that the negative rent seeking effect is dominant.

Suggested Citation

  • Farla K. & Crombrugghe D.P.I. de & Verspagen B., 2013. "Institutions, foreign direct investment, and domestic investment : crowding out or crowding in?," MERIT Working Papers 2013-054, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    • Handle: RePEc:unm:unumer:2013054
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    More about this item

    Keywords

    Institutions and the Macroeconomy; International Investment; Long-term Capital Movements; Globalization: Macroeconomic Impacts; Macroeconomic Analyses of Economic Development; Technological Change; Research and Development; Intellectual Property Rights; Comparative Studies of Countries;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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