Institutional Determinants of Foreign Direct Investment

19 Pages Posted: 2 May 2007

See all articles by Agnès Bénassy-Quéré

Agnès Bénassy-Quéré

Paris School of Economics (University Paris 1)

Maylis Coupet

Ecole Normale Superieure de Cachan; ENSAE

Thierry Mayer

Université Paris I Panthéon-Sorbonne - TEAM; Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris; Centre for Economic Policy Research (CEPR)

Abstract

In this paper, we contribute to the literature on the determinants of foreign direct investment in developing countries and re-evaluate the role of the quality of institutions on FDI independently of the general level of development. We implement cross-section estimations based on a newly available database with unprecedented detail on institutions for a set of 52 countries, as well as panel data estimations based on Fraser Institute's data. Furthermore, we control for the correlation between institutions and GDP per capita and for endogeneity of institutions. Finally, we evaluate whether the similarity of institutions between the host and the origin country raises bilateral FDI. We find that a wide range of institutions, including bureaucracy, corruption, but also information, banking sector and legal institutions, do matter for inward FDI independently of GDP per capita. Interestingly, weak capital concentration and strong employment protection tend to reduce inward FDI. Institutional proximity between the origin and the host country also matters, but we find little impact of institutions in the origin country. These results are encouraging in the sense that efforts towards raising the quality of institutions and making them converge towards those of source countries may help developing countries to receive more FDI, independently of the indirect impact of higher GDP per capita. The orders of magnitude found in the paper are large, meaning that moving from a low level to a high level of institutional quality could have as much impact as suddenly becoming a neighbour of a source country.

Suggested Citation

Benassy-Quere, Agnes and Coupet, Maylis and Mayer, Thierry, Institutional Determinants of Foreign Direct Investment. World Economy, Vol. 30, No. 5, pp. 764-782, May 2007, Available at SSRN: https://ssrn.com/abstract=981622 or http://dx.doi.org/10.1111/j.1467-9701.2007.01022.x

Agnes Benassy-Quere (Contact Author)

Paris School of Economics (University Paris 1) ( email )

106-112 boulevard de l'Hopital
Paris, F-75013
France
+33 1 44 07 82 19 (Phone)

HOME PAGE: http://www.parisschoolofeconomics.com/benassy-quere-agnes/agnesb.html

Maylis Coupet

Ecole Normale Superieure de Cachan ( email )

61 avenue du President Wilson
Cachan
France

ENSAE

92245 Malakoff Cedex
France

Thierry Mayer

Université Paris I Panthéon-Sorbonne - TEAM ( email )

106-112 boulevard de l'hôpital
Cedex 13 Paris, P75647
France

HOME PAGE: http://team.univ-paris1.fr/teamperso/mayer/thierry.htm

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4407 8267 (Phone)
+33 1 4407 8267 (Fax)

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris ( email )

9 Rue Georges Pitard
Paris Cedex 15, F-75015
France

HOME PAGE: http://www.cepii.fr/anglaisgraph/pagepers/mayer.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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