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How Does FDI Respond to the Size of Shadow Economy: An Empirical Analysis under a Gravity Model Setting

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  • Mohammad Ali
  • Alok K. Bohara

Abstract

Using a panel study under a gravity model setting focusing on data from 1999 to 2007 for Organization for Economic Co-operation and Development countries, we show that the size of the shadow economy in the host economy relative to the investor economy can play a significant role in attracting Foreign Direct Investment (FDI) inflows. We further explore nonlinearities in how shadow economy differentials affect incoming FDI. Our results match the theoretical predictions which highlight that opportunities for tax evasion can have an impact on the activities of Multinational Corporations.

Suggested Citation

  • Mohammad Ali & Alok K. Bohara, 2017. "How Does FDI Respond to the Size of Shadow Economy: An Empirical Analysis under a Gravity Model Setting," International Economic Journal, Taylor & Francis Journals, vol. 31(2), pages 159-178, April.
    • Handle: RePEc:taf:intecj:v:31:y:2017:i:2:p:159-178
    DOI: 10.1080/10168737.2017.1314533
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    References listed on IDEAS

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    1. Feldstein, Martin & Hines, James R. & Hubbard, R. Glenn (ed.), 1995. "The Effects of Taxation on Multinational Corporations," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226240954, August.
    2. Rafaelita M. Aldaba, 2006. "FDI Investment Incentive System and FDI Inflows : The Philippine Experience," Finance Working Papers 22335, East Asian Bureau of Economic Research.
    3. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2.
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    Cited by:

    1. Oleksii Lyulyov & Bogdan Moskalenko, 2020. "Institutional Quality and Shadow Economy: An Investment Potential Evaluation Model," Virtual Economics, The London Academy of Science and Business, vol. 3(4), pages 131-146, October.
    2. Zeddam Ahmed Amine & Dahmani Mohamed Driouche & Hamrit Abdelatif, 2021. "Informal Sector and International Capital Movement: New Evidence from Some Petroleum Countries," Economics and Business, Sciendo, vol. 35(1), pages 117-132, January.
    3. Rajeev K. Goel & Rati Ram & Friedrich Schneider & Ashley Potempa, 2020. "International movements of money and men: impact on the informal economy," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(1), pages 179-197, January.
    4. Tran, My Thi Ha, 2021. "Public Sector Management And Corruption In Asean Plus Six," OSF Preprints stxw4, Center for Open Science.
    5. T. Bhavan, 2023. "The Nexus Between Foreign Direct Investment, Informal and Formal Sectors in Sri Lanka," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 24(1), pages 7-19, March.
    6. Tobias Zander, 2023. "FDI Flows and the Effects of the Shadow Economy: Evidence from Gravity Modelling," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 9(4), pages 429-454, October.
    7. Ha, Le Thanh & Dung, Hoang Phuong & Thanh, To Trung, 2021. "Economic complexity and shadow economy: A multi-dimensional analysis," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 408-422.
    8. Folorunsho Monsuru Ajide & James Temitope Dada & Johnson Kolawole Olowookere, 2022. "Shadow economy and foreign direct investment in Nigerian manufacturing industry," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 23(2), pages 156-180.
    9. Cong Minh Huynh & Vu Hong Thai Nguyen & Hoang Bao Nguyen & Phuc Canh Nguyen, 2020. "One-way effect or multiple-way causality: foreign direct investment, institutional quality and shadow economy?," International Economics and Economic Policy, Springer, vol. 17(1), pages 219-239, February.
    10. Canh, Nguyen Phuc & Thanh, Su Dinh, 2020. "Financial development and the shadow economy: A multi-dimensional analysis," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 37-54.

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