The effect of institutions on the foreign direct investment-growth nexus: What matters most?

Chengchun Li; Sailesh Tanna; Baseerit Nissah

doi:10.1111/twec.13349

The effect of institutions on the foreign direct investment-growth nexus: What matters most?

Chengchun Li, Sailesh Tanna, Baseerit Nissah

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Abstract

This paper examines the extent to which host-country institutions influence the relationship between inward foreign direct investment (FDI) and economic growth. We develop a theoretical model to analyse how different types of institutions condition the FDI-growth relationship and use various institutional proxies to conduct threshold estimations on panel data for 51 developed and developing countries over the period 1991-2016. Our results consistently reveal a robust, contingent effect of political stability on the FDI-growth nexus, suggesting that, among all the institutional factors considered, the absence of civil conflict or violence in the host economy is most critical in terms of yielding both direct and indirect growth-enhancing benefits associated with technology transfer and spillover effects from FDI inflows. This finding is pertinent to both developed and developing countries, although the threshold level of political stability required to achieve sizeable growth benefits from FDI tends to be lower for developing countries.

Original language	English
Pages (from-to)	1999-2031
Number of pages	33
Journal	The World Economy
Volume	46
Issue number	7
Early online date	26 Oct 2022
DOIs	https://doi.org/10.1111/twec.13349
Publication status	Published - 1 Jul 2023

Bibliographical note

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.© 2022 The Authors. The World Economy published by John Wiley & Sons Ltd

Funder

University Research Projects of Philosophy and Social Sciences, Jiangsu Province, China. Grant Number: 2020SJA1210
Humanities and Social Sciences Youth Foundation, Ministry of Education, China. Grant Number: 22YJCGJW004

Keywords

Foreign direct investment
political institutions
economic institutions
economic growth
threshold estimation

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1111/twec.13349Licence: CC BY

World Economy - 2022 - Li - The effect of institutions on the FDI‐growth nexus what matters mostAccepted author manuscript, 1.17 MBLicence: CC BY
PublishedFinal published version, 1.18 MBLicence: CC BY

Cite this

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AB - This paper examines the extent to which host-country institutions influence the relationship between inward foreign direct investment (FDI) and economic growth. We develop a theoretical model to analyse how different types of institutions condition the FDI-growth relationship and use various institutional proxies to conduct threshold estimations on panel data for 51 developed and developing countries over the period 1991-2016. Our results consistently reveal a robust, contingent effect of political stability on the FDI-growth nexus, suggesting that, among all the institutional factors considered, the absence of civil conflict or violence in the host economy is most critical in terms of yielding both direct and indirect growth-enhancing benefits associated with technology transfer and spillover effects from FDI inflows. This finding is pertinent to both developed and developing countries, although the threshold level of political stability required to achieve sizeable growth benefits from FDI tends to be lower for developing countries.

KW - Foreign direct investment

KW - political institutions

KW - economic institutions

KW - economic growth

KW - threshold estimation

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JF - The World Economy

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The effect of institutions on the foreign direct investment-growth nexus: What matters most?

Abstract

Bibliographical note

Funder

Keywords

UN SDGs

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