Growth effects of FDI in 80 developing economies: the role of policy reforms and institutional constraints

Theoretical and empirical literatures have identified several channels through which foreign direct investment (FDI) influences economic growth. This paper examines the impact of FDI on economic output growth per worker using aggregate production function augmented with FDI inflows, economic policy reforms and institutional constraints. The paper covers 80 developing countries over the period 1980–2006. We use panel data and employ fixed, random effects and GMM methods for estimation. Our results highlight the importance of FDI, policy reforms and institutional development for growth in developing economies. Finally, we demonstrate that irrespective of reforms and institutions, an increase in FDI affects output growth positively.     

The effects of economic freedom on FDI inflows: an empirical analysis

There is a regular emphasis on the significant role of inward Foreign Direct Investment (FDI) in promoting economic growth. This favourable relationship has induced many governments to adopt policies intended to increase FDI inflows and, thereby, to create conducive business and economic conditions for Multinational Enterprises (MNEs). This paper examines the effects of Economic Freedom (EF) and its sub-components reflecting the Quality of Institutions (QIs) on FDI inflows, using indices derived from the Fraser Institute and from the Heritage Foundation. The empirical analysis is carried out for a panel dataset using different econometric methodologies and empirical specifications. The results underline positive effects of EF on FDI inflows. They reveal that EF sub-components have varying impacts on FDI inflows, where rule of law, market openness, and less-restrictive regulatory environment stand out as the major FDI-promoting institutional factors. Also, there is an empirical evidence that the effects of EF sub-components on FDI inflows exhibit variations through the economic characteristics of the host countries and across geo-economic regions. The results suggest that governments should pursue EF-improving policies, which should be tailored according to the economic and geo-economic characteristics of the host countries, to increase FDI inflows.     

Worldwide impact of IMF policies during the Asian crisis: who does the IMF help,creditors or crisis countries?

This paper examines the effects of International Monetary Fund (IMF) policy announcements on financial markets worldwide. We investigate reactions from stock, bond, foreign exchange and futures markets and banking and financial companies during the Asian crisis. We explore the impact of IMF bailouts not only on crisis countries, but also on main creditor countries. We study the impact of local governments’ and public responses in crisis countries to account for interaction between the IMF and local parties. We show IMF involvement and local governments’ co-operation actually helps crisis countries but not creditors. We show that in crisis countries, financial markets generally react unfavourably to their governments’ initial demands for IMF assistance, while compliance of the crisis countries with the IMF policy action is commonly perceived as good news. Financial markets in crisis countries react negatively to prolonged negotiations and government actions against IMF policy. Creditor countries’ financial markets are not responsive to IMF actions in crisis countries. We discuss policy implications of findings.     

Financial reforms and capital flows to emerging Europe

Analysis of 18 emerging European economies finds domestic financial reforms to be positively associated with net capital inflows. Controlling for standard determinants of capital flows, we find banking sector reforms in particular to be consistent with higher net financial inflows, whereas no such correlation is found for security market reforms or for indicators of financial depth. Additional net inflows are reaped by the EU accession countries. Countries with more reformed banking sectors receive significantly higher FDI and “other” investment net inflows; this is also found for gross financial inflows, but not for gross outflows.     

The effects of IMF conditional programs on the unemployment rate

The fundamental mission of the International Monetary Fund (IMF) is to ensure global financial stability and to assist countries in economic turmoil. Although there is a consensus that IMF-supported programs can have a direct effect on the labor market of recipient countries, it remains unclear how IMF participation decision and conditionalities attached to IMF loans can affect the unemployment rate of borrowing countries. Using a world sample of countries from 1980 to 2014, we investigate how lending conditional programs of the IMF affect the unemployment rate. Our analyses account for the selection bias related to, first, the IMF participation decision and, second, the conditions included within the program. We show that IMF program participation significantly increases the unemployment rate of recipient countries. Once we control for the number of conditions, however, we find that only IMF conditions have a detrimental and highly significant effect on the unemployment rate. There is evidence that the adverse short-run effect of IMF conditions holds robust in the long-run. Disaggregating IMF conditionality by issue area, we find adverse effects on the unemployment rate for four policy areas: labor market deregulation, reforms requiring privatization of state-owned enterprises, external sector reforms stipulating trade and capital account liberalization, and fiscal policy reforms that restrain government expenditure. Our initial results are found to be robust across alternative empirical specifications.     

资本账户自由化、信贷扩张与系统性银行危机风险*

本文研究在资本账户自由化下，信贷扩张与资本流入对于系统性银行危机风险的影响。利用89个国家1973—2016年的长面板数据，并控制影响银行危机风险多项因素后，研究发现资本账户自由化有助于降低银行危机风险。进一步研究发现，FDI流入能显著降低银行危机风险；适量的股权投资流入有助于增强银行业稳定性；但当股权投资大量流入时，伴随着信贷过度扩张和资产泡沫，银行危机风险急剧增加；较低的债权投资流入对银行业稳定性无显著影响，但当超过一定规模时，银行危机风险显著增加。     

Foreign Direct Investment and External Financing Conditions: Evidence from Normal and Crisis Times

In this paper, we investigate the effects that external financing conditions in source and destination countries have on foreign direct investment (FDI) in normal and crisis times, using a difference‐in‐differences approach. We find that the financial development of the source and destination countries has a strong positive impact on the relative volume of FDI in financially vulnerable sectors in normal times. However, during the 2008–2010 global financial crisis, the relative volume of FDI in financially vulnerable sectors fell relatively more in financially developed source and destination countries, most notably if these countries experienced a credit crisis.     

Foreign Direct Investment Determinants in OECD and Developing Countries

In this paper we examine the foreign direct investment (FDI) inflow determinants in 24 Organisation for Economic Co‐operation and Development (OECD) and 22 developing (non‐OECD) countries over 1980–2012, using the standard fixed effects as well as a dynamic panel approach. The most robust finding is that lagged FDI, market size, gross capital formation and corporate taxation significantly affect FDI inflows in OECD countries. We also examine a group of developing countries, taking into consideration the increased share of world FDI inflows that developing countries have attracted, and compare the results. In this case, lagged FDI, market size, labor cost and institutional variables provide the most robust results. The empirical results have important policy implications indicating the factors that host economies should emphasize in order to attract FDI inflows.     

资本账户自由化、信贷扩张与系统性银行危机风险*

本文研究在资本账户自由化下，信贷扩张与资本流入对于系统性银行危机风险的影响。利用89个国家1973—2016年的长面板数据，并控制影响银行危机风险多项因素后，研究发现资本账户自由化有助于降低银行危机风险。进一步研究发现，FDI流入能显著降低银行危机风险；适量的股权投资流入有助于增强银行业稳定性；但当股权投资大量流入时，伴随着信贷过度扩张和资产泡沫，银行危机风险急剧增加；较低的债权投资流入对银行业稳定性无显著影响，但当超过一定规模时，银行危机风险显著增加。       

Financial and Corporate Sector Restructuring in South Korea: Accomplishments and Unfinished Agenda

Following the Asian financial crisis, South Korea has undertaken wide-ranging, economic structural reforms under IMF conditionality while receiving IMF assistance. This paper describes Korean accomplishments in restructuring the financial and corporate sectors, and also addresses the unfinished agendas. It suggests ongoing reforms in a knowledge-based economy, in which the financial sector serves as the "brain" of market economy by allocating scarce capital to the most profitable firms within South Korea. It also recommends that subsidiary companies of Korean chaebols become independent viable business units, and that new sources of growth be found by promoting Korean SMEs and venture businesses. JEL Classification Numbers: E44, F34, G18, G32, G34, L11, L22, O16, O53.     

Foreign direct investment in OECD countries: a special focus in the case of Greece

Foreign Direct Investment (FDI) is considered as an important instrument for economic development all over the world. The aim of this paper is to examine the FDI inflows determinants for 24 OECD countries. To this end we employ annual data from 1980 to 2012 for a series of potential FDI determinants that have been identified as the most important by the relevant literature. Our empirical strategy employs both the standard fixed effects panel as well as a dynamic panel approach. The empirical findings highlight the importance of market size, trade openness, unit labor cost, schooling, taxation, gross capital formation, institutional variables, and ROA/ROE as significant FDI determinants. In the case of the dynamic panel model those FDI inflows determinants are not uniform for all country groups. Additionally, the results indicate that corporate tax rates clearly affect FDI attractiveness. This finding is robust when testing different countries subgroups. The present study has important policy implications indicating the factors that host economies should place emphasis on in order to attract FDI inflows. Policy makers should not only pay attention to the corporate tax rate level but they should also design a simple, stable and transparent taxation system that minimizes the relevant business risk.     

Do capital flows drive credit growth and consumption in Central and Eastern Europe?

Domestic credit expansion in CEE economies, fuelled in part by foreign capital inflows, helped increase household welfare before the 2008 financial crisis caused a contraction across the region. How strong are the linkages between the current account, domestic credit and consumer spending? This study compiles a quarterly dataset of domestic credit as a share of GDP for 11 CEE European Union members and isolates structural breaks in the series’ growth rates that often align with the 2008 crisis. Vector autoregressive methods, particularly impulse response functions, show that increased current-account deficits lead to increased consumption in six of the 11 countries and increased credit growth in three, and that shocks to credit growth increase consumption in six countries. Capital inflows significantly increase consumption through domestic credit in Slovenia, while the Baltics show a large share of significant effects.     

Does domestic financial development enhance the linkages between foreign direct investment and economic growth?

The study examines the relationship between foreign direct investment (FDI), financial development, and economic growth in a panel of 95 developed and developing countries from 1983 to 2006. The study moves away from the traditional cross-sectional analysis, and focuses on more direct evidence of the channels via which FDI might help or retard economic growth. Using generalized method of moment (GMM) panel data analysis, we find strong evidence of a positive relationship between FDI inflows into a country and its economic performance. We also find evidence that domestic financial system is a significant prerequisite for FDI to have a positive effect on economic growth. Policy implications are clear. Effort should be made to reform and improve the development of domestic financial system in order to benefit more from the presence of FDI.     

Corporate tax rates and foreign direct investment in the United States

A significant research effort has been directed at establishing the determinants of foreign direct investment (FDI), with taxation policy identified as an important factor. However, the empirical literature has been limited in several respects, with most work focused exclusively on host country tax regimes. This paper seeks to extend the boundaries of FDI empirical inquiry by using a panel of nine investing tax exemption and tax credit countries over the period 1982–2000, constituting more than 85% of total US FDI inflows, and incorporating home country tax rates to analyse two as yet unanswered questions. First, are corporate income tax rates an important determinant of FDI in the US? Secondly, do investors from tax credit countries differ significantly in their tax response relative to those from tax exemption countries?     

Fire‐sale FDI? The Impact of Financial Crises on Foreign Direct Investment

We analyze the evolution of foreign direct investment (FDI) inflows to developing and emerging countries around financial crises. We empirically examine the Fire‐Sale FDI hypothesis and describe the pattern of FDI inflows surrounding financial crises. We also add a more granular detail about the types of financial crises and their potentially differential effects on FDI. We distinguish between mergers and acquisitions (M&A) and greenfield investment, as well as between horizontal (tariff jumping) and vertical (integrating production stages) FDI. We find that financial crises have a strong negative effect on inward FDI in our sample. Crises are also shown to reduce the value of horizontal and vertical FDI. We do not find empirical evidence of fire‐sale FDI; on the contrary, financial crises are shown to affect FDI flows and M&A activity negatively.     

中国吸引FDI区位因素实证分析

近年来,随着国际资本流动的愈加频繁迅速,流向中国的外商直接投资越来越多,而FDI在中国经济增长中发挥着发动机的作用。东道国吸引FDI流入的因素有很多,如资源优势、宽松稳定的社会环境等。采用中国1983-2006年的Panel Data数据,在计量方法上采用的是加入虚拟变量的普通最小二乘法并结合格兰杰因果检验,发现FDI累计投资额、市场规模及制度因素促进了FDI的流入,而人力资本、市场开放度对FDI的流入无积极影响。并给出相关的政策建议。     

外商直接投资与东亚金融危机——一个新的分析视角

关于东亚金融危机爆发原因的研究很多。但是大多数研究没有注意到FDI的大量流入对于东亚国家爆发金融危机的影响。虽然FDI没有直接引起金融危机的爆发,但是它确实对危机国家经济脆弱性的形成发挥了作用。FDI给东道国带来的金融风险往往是潜在的,如果不能有效监管,这种潜在金融风险就有转化成现实金融风险的可能。所以,一味提高FDI的引资比重并不能使发展中国家摆脱金融危机的侵扰,发展中国家有必要加强对FDI的监管。     

Foreign Capital in a Growth Model

Within the mechanism of endogenous growth, this paper empirically investigates the impact of financial capital on economic growth for a panel of 60 developing countries, through the channel of domestic capital formation. By estimating the model for different income groups, it is found that while private FDI flows exert beneficial complementarity effects on the domestic capital formation across all income‐group countries, the official financial flows contribute to increasing investment in the middle income economies, but not in the low income countries. The latter appears to demonstrate that the aid‐growth nexus is supported in the middle income countries, whereas the misallocation of official inflows is more likely to exist in the low income countries, suggesting that aid effectiveness remains conditional on the domestic policy environment.     

Examining the effect of IMF conditionality on natural resource policy

Can International Monetary Fund (IMF) lending improve natural resource governance in borrowing countries? While most IMF agreements mandate policy reforms in exchange for financial support, compliance with these reforms is mixed at best. The natural resource sector should be no exception. After all, resource windfalls enable short-term increases in discretionary spending, and office-seeking politicians are often unwilling to forgo this discretion by reforming the oil, gas, or mining sector. I investigate how and when borrowers go against their political interests and establish natural resource funds—a tool often promoted by the IMF—in the wake of a loan agreement. Using text analysis, statistical models, and qualitative evidence from natural resource policy and IMF conditionality for 74 countries between 1980 and 2019, I show that borrowers under an IMF agreement are more likely to create or regulate a resource fund, particularly if the agreement includes binding conditions that highlight the salience of natural resource reforms. This study contributes to extant research by proposing a new method to extract information from IMF conditions, by introducing a novel dataset on country-level natural resource policy, and by identifying under what circumstances international reform efforts can help combat the resource curse.     

Financial market development,global financial crisis and economic growth: evidence from developing nations

Emerging and frontier markets in Africa have witnessed various economic and financial reforms aimed at integrating the domestic markets into the global financial market to attract investment. Whether these reforms promote high economic growth remains inconclusive. The paper applies the pooled mean group estimation technique to empirically re-investigate the link between financial market development, global financial crisis, and economic growth in selected African economies. The results strongly support our hypotheses that stock market and banking sector development promotes economic growth in the selected countries. Moreover, financial crisis reduce the positive effects of both the stock market and banking sector developments on economic growth. The study suggests that both the banking sector and stock market are important to deliver the long-run economic growth that the African region desired. Moreover, effort should be made to enact policy measures that would ensure development of the stock market which has received inadequate attention.