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Fiscal Rules and Foreign Direct Investment in developing countries

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  • HISGUIMA DASSIDI Crépin

Abstract

This study analyses the effect of fiscal rules on Foreign Direct Investment (FDI) in developing countries. Using a sample of 78 countries, we use the entropy balancing method to analyze the causal effect of rule adoption on FDI. Two hypotheses are tested in this study. The first one states that adopting fiscal rules increases FDI, and the second one is related to the ability of different types of rules to attract more investments. First, the robust results show that adopting fiscal rules increases FDI. The ratio of the public deficit to GDP, the rating of long-term sovereign debt in foreign currency, and the ratio of short-term external debt outstanding are the transmission channels through which fiscal rules affect FDI. The effect of the rules is amplified in the presence of a high level of business climate, economic performance, and better structuring of the agricultural and industrial sectors. On the other hand, this effect is attenuated in the presence of mineral rents and the economy’s high real interest rate.

Suggested Citation

  • HISGUIMA DASSIDI Crépin, 2023. "Fiscal Rules and Foreign Direct Investment in developing countries," Working Papers REM 2023/0299, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp02992023
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    More about this item

    Keywords

    Fiscal rules; Foreign Direct Investment; fiscal policy;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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