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Domestic interest rate, foreign direct investment, and corruption

Author

Listed:
  • Nadine McCloud

    (The University of the West Indies at Mona)

  • Michael S. Delgado

    (Purdue University)

Abstract

It has been argued that foreign direct investment can exert upward or downward pressure on the domestic interest rate depending on foreign investors’ relative weights on internal and external finance with respect to the domestic economy. Additionally, a country’s level of corruption can influence firms’ ability to obtain external finance. We find that across countries a 1 percent increase in FDI inflows (outflows) is more likely to reduce the domestic interest rate by as much as 0.7 (1) percent. This empirical association between domestic interest rates and FDI flows is non-monotonically contingent on a country’s level of corruption.

Suggested Citation

  • Nadine McCloud & Michael S. Delgado, 2022. "Domestic interest rate, foreign direct investment, and corruption," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(2), pages 467-491, May.
    • Handle: RePEc:spr:weltar:v:158:y:2022:i:2:d:10.1007_s10290-021-00435-0
    DOI: 10.1007/s10290-021-00435-0
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    More about this item

    Keywords

    Interest rate; Foreign direct investment; Corruption; Instrumental variables; Generalized method of moments; Semiparametric estimation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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