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Post-Manichean Economics: Foreign Investment, State Capacity and Economic Development in Transition Economies

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  • Patrick Hamm
  • Lawrence King

Abstract

This paper evaluates the role of foreign direct investment (FDI) in the transition from socialism to capitalism. Fixed-effects panel regressions indicate that FDI and domestic investment have an equal effect on growth in the first year of investment, but over time FDI is associated with greater growth than domestic investment. However, this positive impact of FDI turns out to be contingent upon the presence of a relatively well-functioning state in the host economy; in the absence of such a state, the net effect of FDI on economic development may be negative. All findings are robust in light of instrumental variable estimation, which is used to account for potential endogeneity problems.

Suggested Citation

  • Patrick Hamm & Lawrence King, 2010. "Post-Manichean Economics: Foreign Investment, State Capacity and Economic Development in Transition Economies," Working Papers wp227, Political Economy Research Institute, University of Massachusetts at Amherst.
    • Handle: RePEc:uma:periwp:wp227
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    1. Cingolani L, 2013. "The State of State Capacity : a review of concepts, evidence and measures," MERIT Working Papers 2013-053, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    2. Cingolani, Luciana & Thomsson, Kaj & de Crombrugghe, Denis, 2015. "Minding Weber More Than Ever? The Impacts of State Capacity and Bureaucratic Autonomy on Development Goals," World Development, Elsevier, vol. 72(C), pages 191-207.
    3. María Franco Chuaire & Carlos Scartascini & Mariano Tommasi, 2017. "State capacity and the quality of policies. Revisiting the relationship between openness and government size," Economics and Politics, Wiley Blackwell, vol. 29(2), pages 133-156, July.

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