Working Paper #2013-054
Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?
Studies of the relationship between FDI and domestic investment levels
reach contradictory findings. We revisit this empirical relationship and
argue that some of 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 contribute positively to domestic
investment levels. We also find weak evidence that `good governance',
proxied with using the Worldwide Governance Indicators (and two rent
seeking indicators we built), encourages investment. Theoretical
arguments support either positive or negative interaction effects of
`good governance' and FDI on investment, invoking either technological
spillovers or rent seeking behaviour. We tend to conclude that the
negative rent seeking effect is dominant.
- Keywords
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- Investment
- FDI
- Institutions
- Technology spillover
- Rent seeking
- JEL codes
-
- E02
- F21
- F62
- O11
- O30
- O57
Cite this as
APA 7th ed.Farla, K., de Crombrugghe, D., & Verspagen, B. (2013). Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in? (UNU-MERIT Working Paper No. 2013-054). UNU-MERIT. https://unu-merit.nl/publications/working-papers/abstract/?id=5018