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Governance and foreign direct investment: is there a two-way relationship?

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  • Arijit Mukherjee
  • Leonard F.S. Wang
  • Yingyi Tsai

Abstract

The issue of economic governance is highly discussed pertaining to the question of industrialisation of a country, yet the literature on international trade and foreign direct investment (FDI) hardly pays attention to this aspect. We show that higher investment in economic governance attracts FDI. However, whether the possibility of FDI induces more investment in governance is not immediate, and depends on the factors such as the marginal cost difference between the firms, the international transportation cost and the cost of FDI. Our results suggest that we may expect a two-way relationship between investment in economic governance and inward FDI in more technologically backward domestic countries. However, a less technologically backward domestic country may have a strategic reason for relatively poor economic governance in order to prevent FDI, if we control for other benefits from FDI, such as knowledge spillover and domestic employment generation.

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  • Arijit Mukherjee & Leonard F.S. Wang & Yingyi Tsai, 2011. "Governance and foreign direct investment: is there a two-way relationship?," Discussion Papers 11/02, University of Nottingham, School of Economics.
    • Handle: RePEc:not:notecp:11/02
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    1. Jurčić Ljubo & Franc Sanja & Barišić Antea, 2020. "Impact of Institutional Quality on Foreign Direct Investment Inflow: Evidence from Croatia," Business Systems Research, Sciendo, vol. 11(1), pages 44-58, March.

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