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Growth Effect of Foreign Direct Investment in Developing Economies: The Role of Institutional Quality
Author(s) -
Jude Cristina,
Levieuge Gregory
Publication year - 2017
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12402
Subject(s) - foreign direct investment , economics , quality (philosophy) , panel data , international economics , sample (material) , investment (military) , developing country , macroeconomics , politics , econometrics , economic growth , philosophy , chemistry , epistemology , chromatography , political science , law
This paper investigates the effect of foreign direct investment (FDI) on economic growth conditional on the institutional quality of host countries. We first develop several theoretical arguments to show that institutional heterogeneity may be an explanation for the mixed results of previous empirical studies. Second, using a panel smooth regression model on a large sample of developing countries, we show that FDI has a positive effect on growth only beyond a certain threshold of institutional quality. To benefit from FDI‐led growth, institutional reforms should thus precede FDI attraction policies. Additionally, some reforms seem to promote faster marginal effects of FDI, while institutional complementarities may lead to an incremental effect on growth.