Developing inclusive economic institutions in South countries: The role of FDI

Foreign Direct Investment (FDI) flows to developing economies have increased significantly over the last decades, bringing about important changes in the developing world. This paper is interested in the institutional aspect of these changes, a dimension weakly investigated in the development literature. More precisely, it explores the effects of FDI flows to developing economies on their economic institutions through a panel framework analysis. The results based on a large sample of developing countries over the period 1990-2009 show that total FDI (from developed and developing countries) have a positive impact on economic institutions. They also suggest that FDI flows from developed economies tend to favor inclusive economic institutions in developing countries while no clear evidence on an effect of flows from developing economies is found. Furthermore, the positive institutional impact of total FDI is mitigated in countries where the natural resources sector plays a prominent role in attracting FDI. Overall, the findings are robust to a series a robustness checks including the use of an alternative measure of economic institutions, the test of a delayed effect of FDI, the exclusion of outliers from the sample, and the test of any specific income group or regional effect.