Institutions, foreign direct investment, and domestic investment : crowding out or crowding in?

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Studies of the relationship between FDI and domestic investment levels reach
contradictory findings. We revisit this empirical relationship and argue that some
of the conflicting evidence may be explained by the use of poor proxies for the true underlying variables and by questionable methodological choices. Using more
appropriate proxies and statistical models, we conclude that FDI inflows contribute
positively to domestic investment levels. We also find weak evidence that `good
governance', proxied with using the Worldwide Governance Indicators (and two
rent seeking indicators we built), encourages investment. Theoretical arguments
support either positive or negative interaction effects of `good governance' and FDI
on investment, invoking either technological spillovers or rent seeking behaviour.
We tend to conclude that the negative rent seeking effect is dominant.
Original languageEnglish
Place of PublicationMaastricht
Number of pages46
Publication statusPublished - 1 Jan 2013

Publication series

SeriesUNU-MERIT Working Papers

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