Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?

Farla, Kristine, De Crombrugghe, Denis and Verspagen, Bart (2013). Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?. UNU-MERIT.

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  • Sub-type Working paper
    Author Farla, Kristine
    De Crombrugghe, Denis
    Verspagen, Bart
    Title Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?
    Publication Date 2013
    Place of Publication Maastricht
    Publisher UNU-MERIT
    Pages 51
    Abstract 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.
    Keyword Investment
    FDI
    Institutions
    Technology spillover
    Rent seeking
    JEL E02
    F21
    F62
    O11
    O30
    O57
    Copyright Holder UNU-MERIT
    Copyright Year 2013
    Copyright type Creative commons
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    Created: Wed, 11 Dec 2013, 17:24:22 JST