IDEAS home Printed from https://ideas.repec.org/p/dul/wpaper/07-13rs.html
   My bibliography  Save this paper

Revisiting the relationship between governance and foreign direct investment

Author

Listed:
  • Pierre-Guillaume Méon
  • Khalid Sekkat

Abstract

Using a sample of 96 countries over the nineties, this paper examines the extent to which different dimensions of governance affect FDI inflows. It considers six aspects of governance. The results of a least-squares estimation suggest a positive relationship between institutional quality and FDI. However, when the issue of the endogeneity of governance is tackled thanks to 2SLS regressions, the relationship appears much weaker.

Suggested Citation

  • Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," DULBEA Working Papers 07-13.RS, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:dul:wpaper:07-13rs
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/8424/1/pgm-0036.pdf
    File Function: pgm-0036
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Philipp Harms & Heinrich W. Ursprung, 2002. "Do Civil and Political Repression Really Boost Foreign Direct Investments?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 651-663, October.
    2. Grogan, Louise & Moers, Luc, 2001. "Growth empirics with institutional measures for transition countries," Economic Systems, Elsevier, vol. 25(4), pages 323-344, December.
    3. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank.
    4. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    5. Egger, Peter & Winner, Hannes, 2005. "Evidence on corruption as an incentive for foreign direct investment," European Journal of Political Economy, Elsevier, vol. 21(4), pages 932-952, December.
    6. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
    7. Pierre‐Guillaume Méon & Khalid Sekkat, 2008. "Institutional Quality And Trade: Which Institutions? Which Trade?," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 227-240, April.
    8. Djankov, Simeon & Glaeser, Edward & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2003. "The new comparative economics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 595-619, December.
    9. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    10. Brunetti, Aymo & Kisunko, Gregory & Weder, Beatrice, 1998. "Credibility of Rules and Economic Growth: Evidence from a Worldwide Survey of the Private Sector," The World Bank Economic Review, World Bank, vol. 12(3), pages 353-384, September.
    11. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 41-61.
    12. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross‐Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    13. Méon, Pierre-Guillaume & Weill, Laurent, 2010. "Is Corruption an Efficient Grease?," World Development, Elsevier, vol. 38(3), pages 244-259, March.
    14. Easton, Stephen T & Walker, Michael A, 1997. "Income, Growth, and Economic Freedom," American Economic Review, American Economic Association, vol. 87(2), pages 328-332, May.
    15. Pierre‐Guillaume Méon & Khalid Sekkat, 2004. "Does the Quality of Institutions Limit the MENA's Integration in the World Economy?," The World Economy, Wiley Blackwell, vol. 27(9), pages 1475-1498, September.
    16. Olson, Mancur, Jr & Sarna, Naveen & Swamy, Anand V, 2000. "Governance and Growth: A Simple Hypothesis Explaining Cross-Country Differences in Productivity Growth," Public Choice, Springer, vol. 102(3-4), pages 341-364, March.
    17. Stevens, Guy V. G., 2000. "Politics, economics and investment:: Explaining plant and equipment spending by US direct investors in Argentina, Brazil and Mexico," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 153-183, April.
    18. Y. Hisamatsu, 2003. "Does foreign demand affect corruption?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 1-2.
    19. Eckhard Janeba, 2002. "Attracting Fdi in a Politically Risky World," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1127-1155, November.
    20. Knack, Stephen & Keefer, Philip, 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Indicators," MPRA Paper 23118, University Library of Munich, Germany.
    21. Globerman, Steven & Shapiro, Daniel, 2002. "Global Foreign Direct Investment Flows: The Role of Governance Infrastructure," World Development, Elsevier, vol. 30(11), pages 1899-1919, November.
    22. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
    23. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    24. Pierre-Guillaume Méon & Khalid Sekkat, 2005. "Does corruption grease or sand the wheels of growth?," Public Choice, Springer, vol. 122(1), pages 69-97, January.
    25. Treisman, Daniel, 2000. "The causes of corruption: a cross-national study," Journal of Public Economics, Elsevier, vol. 76(3), pages 399-457, June.
    26. James R. Hines, Jr., 1995. "Forbidden Payment: Foreign Bribery and American Business After 1977," NBER Working Papers 5266, National Bureau of Economic Research, Inc.
    27. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 83-116.
    28. Schneider, Friedrich & Frey, Bruno S., 1985. "Economic and political determinants of foreign direct investment," World Development, Elsevier, vol. 13(2), pages 161-175, February.
    29. Morisset, Jacques, 2000. "Foreign direct investment in Africa : policies also matter," Policy Research Working Paper Series 2481, The World Bank.
    30. Matthias Busse, 2004. "Transnational Corporations and Repression of Political Rights and Civil Liberties: An Empirical Analysis," Kyklos, Wiley Blackwell, vol. 57(1), pages 45-65, February.
    31. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    32. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
    33. repec:ulb:ulbeco:2013/7360 is not listed on IDEAS
    34. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2008. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 347-368, May.
    35. Kirt C Butler & Domingo Castelo Joaquin, 1998. "A note on political risk and the required return on foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(3), pages 599-607, September.
    36. Vinod, Hrishikesh D., 2003. "Open economy and financial burden of corruption: theory and application to Asia," Journal of Asian Economics, Elsevier, vol. 13(6), pages 873-890, January.
    37. Edgardo Campos, J. & Lien, Donald & Pradhan, Sanjay, 1999. "The Impact of Corruption on Investment: Predictability Matters," World Development, Elsevier, vol. 27(6), pages 1059-1067, June.
    38. Faria, Andr & Mauro, Paolo, 2009. "Institutions and the external capital structure of countries," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 367-391, April.
    39. Stephen Knack & Omar Azfar, 2003. "Trade intensity, country size and corruption," Economics of Governance, Springer, vol. 4(1), pages 1-18, April.
    40. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 133-162, January.
    41. Mr. Vito Tanzi & Mr. Hamid R Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 1997/139, International Monetary Fund.
    42. Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-781, August.
    43. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
    44. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
    45. Jensen, Nathan M., 2003. "Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment," International Organization, Cambridge University Press, vol. 57(3), pages 587-616, July.
    46. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
    47. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
    48. Li, Quan & Resnick, Adam, 2003. "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries," International Organization, Cambridge University Press, vol. 57(1), pages 175-211, January.
    49. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 16(2), pages 334-364, October.
    50. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December.
    51. Adam L. Resnick, 2001. "Investors, turbulence, and transition: Democratic transition and foreign direct investment in nineteen developing countries," International Interactions, Taylor & Francis Journals, vol. 27(4), pages 381-398, June.
    52. Johann Lambsdorff, 2003. "How corruption affects persistent capital flows," Economics of Governance, Springer, vol. 4(3), pages 229-243, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dima Stela, 2016. "Globalisation, Trade Openness and Foreign Direct Investment in Romania," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 26(4), pages 41-53, November.
    2. Hassan Ayoub & Jérôme Creel & Etienne Farvaque, 2008. "Détermination du niveau des prix et finances: le cas du Liban 1965-2005," DULBEA Working Papers 08-10.RS, ULB -- Universite Libre de Bruxelles.
    3. Jean-Luc Demeulemeester & Olivier Debande, 2008. "Quality and Variety Competition in Higher Education," Working Papers 08-10, Association Française de Cliométrie (AFC).
    4. Benoît Mahy & François Rycx & Mélanie Volral, 2008. "L'influence de la dispersion salariale sur la performance des grandes entreprises belges," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(3), pages 27-40.
    5. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
    6. Jean Luc De Meulemeester, 2007. "L'économie de l'éducation fait-elle des progrès? Une perspective d'histoire de la pensée économique," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 89-111.
    7. Henri Capron & Michele Cincera, 2007. "EU pre-competitive and near-the-market S&T collaborations," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 135-159.
    8. Mumtaz Hussain Shah & Anum Gul Afridi, 2015. "Significance of Good Governance for FDI Inflows in SAARC Countries," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 7(2), pages 31-52, October.
    9. Charles Plaigin, 2009. "Exploratory study on the presence of cultural and institutional growth spillovers," DULBEA Working Papers 09-03.RS, ULB -- Universite Libre de Bruxelles.
    10. Jérôme De Henau & Leila Maron & Danièle Meulders & Sile Padraigin O'Dorchai, 2007. "Travail et maternité en Europe: conditions de travail et politiques publiques," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 63-88.
    11. Henri Capron, 2007. "Politique de cohésion et développement régional," DULBEA Working Papers 07-16.RS, ULB -- Universite Libre de Bruxelles.
    12. Strand, Jon, 2009. ""Revenue management"effects related to financial flows generated by climate policy," Policy Research Working Paper Series 5053, The World Bank.
    13. Ariane Szafarz, 2007. "Hiring people-like-yourself: a representation of discrimination on the job market," DULBEA Working Papers 07-21.RS, ULB -- Universite Libre de Bruxelles.
    14. Sile Padraigin O'Dorchai, 2008. "Pay inequality in 25 European countries," DULBEA Working Papers 0006, ULB -- Universite Libre de Bruxelles.
    15. Luisa Melo & Michael A. Quinn, 2015. "Oil. Foreign Direct Investment an d Corruption," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(1), pages 33-49.
    16. Pierre-Guillaume Méon & Ariane Szafarz, 2008. "Labor market discrimination as an agency cost," DULBEA Working Papers 08-19.RS, ULB -- Universite Libre de Bruxelles.
    17. Caroline Gerschlager, 2008. "Foolishness and identity: Amartya Sen and Adam Smith," DULBEA Working Papers 08-03.RS, ULB -- Universite Libre de Bruxelles.
    18. Kuloglu, Ayhan & Lobont, Oana-Ramona & Topcu, Mert, 2012. "A question of causality between political corruption, economic freedom and economic growth in Europe," MPRA Paper 40365, University Library of Munich, Germany.
    19. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 41-61.
    20. Philipp Harms & Pierre-Guillaume Méon, 2013. "The Composition of FDI in the MENA Region and Other Countries: Econometric Investigation and Implications for MENA Countries," Working Papers 793, Economic Research Forum, revised Nov 2013.
    21. Abdeslam Marfouk, 2008. "The African brain drain: scope and determinants," DULBEA Working Papers 08-07.RS, ULB -- Universite Libre de Bruxelles.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pierre‐Guillaume Méon & Khalid Sekkat, 2004. "Does the Quality of Institutions Limit the MENA's Integration in the World Economy?," The World Economy, Wiley Blackwell, vol. 27(9), pages 1475-1498, September.
    2. Pierre‐Guillaume Méon & Khalid Sekkat, 2008. "Institutional Quality And Trade: Which Institutions? Which Trade?," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 227-240, April.
    3. Bailey, Nicholas, 2018. "Exploring the relationship between institutional factors and FDI attractiveness: A meta-analytic review," International Business Review, Elsevier, vol. 27(1), pages 139-148.
    4. Fathi Ali & Norbert Fiess & Ronald MacDonald, 2010. "Do Institutions Matter for Foreign Direct Investment?," Open Economies Review, Springer, vol. 21(2), pages 201-219, April.
    5. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    6. Akhtaruzzaman, M. & Berg, Nathan & Hajzler, Christopher, 2017. "Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?," European Journal of Political Economy, Elsevier, vol. 49(C), pages 84-107.
    7. Michel Beine & Khalid Sekkat, 2013. "Skilled migration and the transfer of institutional norms," IZA Journal of Migration and Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-19, December.
    8. Graf Lambsdorff, Johann, 2005. "Consequences and causes of corruption: What do we know from a cross-section of countries?," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-34-05, University of Passau, Faculty of Business and Economics.
    9. Eugen Dimant & Guglielmo Tosato, 2018. "Causes And Effects Of Corruption: What Has Past Decade'S Empirical Research Taught Us? A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 335-356, April.
    10. Gossel, Sean Joss, 2018. "FDI, democracy and corruption in Sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 40(4), pages 647-662.
    11. Mohsin Hasnain Ahmad & Qazi Masood Ahmed, 2014. "Does the Institutional Quality Matter to Attract the Foreign Direct Investment? An Empirical Investigation for Pakistan," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 15(1), pages 55-70, March.
    12. Michel Beine & Khalid Sekkat, 2014. "Emigration and origin country's institutions: does the destination country matter?," Middle East Development Journal, Taylor & Francis Journals, vol. 6(1), pages 20-44, January.
    13. repec:pdn:wpaper:79 is not listed on IDEAS
    14. Andreia Olival, 2012. "The influence of Doing Business’ institutional variables in Foreign Direct Investment," GEE Papers 0048, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Dec 2012.
    15. Siddiqui, Danish Ahmed & Ahmed, Qazi Masood, 2013. "The effect of institutions on economic growth: A global analysis based on GMM dynamic panel estimation," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 18-33.
    16. repec:pdn:wpaper:70 is not listed on IDEAS
    17. Axel Dreher & Thomas Herzfeld, 2005. "The Economic Costs of Corruption: A Survey and New Evidence," Public Economics 0506001, University Library of Munich, Germany.
    18. Sumanjeet, 2015. "Institutions, Transparency, and Economic Growth," Emerging Economy Studies, International Management Institute, vol. 1(2), pages 188-210, November.
    19. David A. Wernick & Jerry Haar & Latika Sharma, 2014. "The Impact of Governing Institutions on Foreign Direct Investment Flows: Evidence from African Nations," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 5(2), pages 1-12, March.
    20. Krifa-Schneider, Hadjila & Matei, Iuliana & Sattar, Abdul, 2022. "FDI, corruption and financial development around the world: A panel non-linear approach," Economic Modelling, Elsevier, vol. 110(C).

    More about this item

    Keywords

    Institutions; governance; foreign direct investment.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dul:wpaper:07-13rs. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benoit Pauwels (email available below). General contact details of provider: https://edirc.repec.org/data/dulbebe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.