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Foreign direct investment and institutional reform: evidence and an application to Portugal |
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| Authors: | Paulo Júlio Ricardo Pinheiro–Alves José Tavares |
| Affiliation: | 1. Economics and Research Department, Banco de Portugal, Rua Francisco Ribeiro, 2, 1150–165, Lisbon, Portugal 2. Office for Strategy and Studies, Portuguese Ministry of Economy and Employment, Rua da Prata, 8, 1149–057, Lisbon, Portugal 3. IADE, Instituto de Artes Visuais, Design e Marketing, Lisbon, Portugal 4. NOVA School of Business and Economics, INOVA, Universidade Nova de Lisboa, Campus de Campolide, 1099–032, Lisbon, Portugal 5. Centre for Economic Policy Research, London, UK |
| Abstract: | We examine the role of geographic, economic, and institutional factors in attracting Foreign Direct Investment (FDI) in Europe, using a cross-section of inward bilateral investments. We estimate and assess the expected benefits, the required reform efforts, and the efficiency of reform options corresponding to a convergence of Portuguese institutions to EU standards. We conclude that improving home institutions is likely to have a quantitatively very significant role in attracting FDI. Geographical and market size factors also play a role. Reforms promoting the independence of financial institutions and a leaner bureaucracy, lowering political risk and corruption, and improving the investment code may significantly affect the amount of bilateral inward FDI that is targeted to Portugal. |
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