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Growth effect of FDI in developing economies: The role of institutional quality

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  • C. Jude
  • G. Levieuge
Abstract
This paper investigates the effect of FDI on economic growth conditional on the institutional quality of host countries. We first develop several theoretical arguments to show that institutional heterogeneity may be an explanation for the mixed results of previous empirical studies. Second, using a Panel Smooth Regression model on a large sample of developing countries, we show that FDI has a positive effect on growth only beyond a certain threshold of institutional quality. In order to benefit from FDI-led growth, institutional reforms should thus precede FDI attraction policies. Additionally, some reforms seem to promote faster marginal effects of FDI, while institutional complementarities may lead to an incremental effect on growth.

Suggested Citation

  • C. Jude & G. Levieuge, 2015. "Growth effect of FDI in developing economies: The role of institutional quality," Working papers 559, Banque de France.
    • Handle: RePEc:bfr:banfra:559
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    More about this item

    Keywords

    FDI; growth; heterogeneity; institutional quality; PSTR; Developing economies;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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