Do changes in the rules of the game affect FDI flows in Latin America? A look at the macroeconomic, institutional and regional integration determinants of FDI

Abstract-Modern trends in economic development are characterized by intensification of competition, globalization of markets and concentration of capital. Attracting foreign direct investment plays a significant role in the growth of developing economies. Assessment of influence that the foreign capital exerts on the receiving party was studied in-depth by a wide range of Russian and foreign scholars, however, the issue is still a debating point among the modern economists. Due to this, the purpose of this paper is to reveal and evaluate the factors that influence attraction of foreign direct investment to developing economies. The paper uses comparative analysis and generalization of available information as its main methods; besides that, it undertakes a content analysis of reports and analytical pieces from leading Russian and foreign works published during several recent decades pertaining to the issue of determination of factors influencing the size of direct foreign investment. An econometric model was conceived from the statistical data covering 19 developing economies that allows estimation of influence from different factors onto the net inflows of direct foreign investments. Dwelling on existing economic theories that describe the economic nature of direct foreign investments, two groups of influence factors were discovered, namely: a group of macroeconomic factors and a group of factors linked to general societal development (11 factors in total). In conclusion, the authors reflect upon the degree and the direction of influence that the macroeconomic and societal development factors have on the net amount of direct foreign investment.

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“…Argentina and China have rich reserves of shale oil [16]. India sees transactions in pharmaceutical industry.…”

Section: Discussionmentioning

confidence: 99%

Assessment of Factor Influencing Attraction of Foreign Direct Investment to Developing Economies

Kozhevnikov¹,

Pridvizhkin²,

Bazhenov³

et al. 2017

Proceedings of the International Conference on Trends of Technologies and Innovations in Economic and Social Studies 2017

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“…of all 12 ICRG indices) Naudé and Krugell (2007) 19 African countries Expropriation Risk (instrumented using settler mortality) Political Stability, Government Accountability, Regulatory Burden, and Rule of Law (WGI) Sánchez-Martin et al (2014) 19 Latin American countries The following section provides a brief description of the indices that we use as measures of institutional quality or, synonymously, as political risk variables. The ICRG provides 12 indices of political risks: Government Stability (12-point scale), Socioeconomic Tensions (12-point scale), Investment Profile (12-point scale), Internal Conflict (12-point scale), External Conflict (12-point scale), Corruption (6 points), Military in Politics (6 points), Religion in Politics (6 points), Law and Order (6 points), Ethnic Tensions (6 points), Democratic Accountability (6 points), and Bureaucratic Quality (4 points).…”

Section: Discussionmentioning

confidence: 99%

“…Other empirical investigations, however, find no (or weak) evidence linking the strength of contract enforcement to FDI (see, for example, Asiedu, 2002;Bénassy-Quéré et al, 2007;Busse and Hefeker, 2007;Jensen, 2003;Naudé and Krugell, 2007;Sánchez-Martin et al, 2014). 6 The latter body of work finds that measures of institutional quality (alternatively referred to as "political risk variables") other than expropriation risk-such as corruption, regulatory burden, and democratic accountability in establishing laws-are more important determinants of FDI inflows.…”

Section: Non-technical Summarymentioning

confidence: 99%

“…Ali et al (2010) argue that highly disaggregated indices are more prone to measurement error, while Biswas (2002) and Busse and Hefeker (2007) emphasize multicollinearity (among the 12 ICRG indices) as the greater methodological challenge. Some authors deal with the issue of multicollinearity by focusing only on a selective set of institutional variables (e.g., Adam and Filippaios, 2007;Sánchez-Martin et al, 2014) or by presenting estimates from models that include only one political risk variable at a time (Busse and Hefeker, 2007;Bénassy-Quéré et al, 2007;Daude and Stein, 2007;Gastanaga et al, 1998). However, if other related institutions in the FDIdata-generating process are omitted from the model, then estimates will, in general, suffer from bias.…”

Section: Indices Measuring Institutional Quality and Political Risksmentioning

confidence: 99%

“…National income normalization is adopted in much of the empirical FDI literature, where the dependent variable is either net or gross FDI expressed as a share of gross domestic product (GDP) or gross national income (GNI) (e.g., Ali et al, 2010;Addison and Heshmati, 2003;Asiedu, 2002Asiedu, , 2006Asiedu et al, 2009;Asiedu and Lien, 2011;Adam and Filippaios, 2007;Gastanaga et al, 1998;Méon and Sekkat, 2004;Naudé and Krugell, 2007;Noorbakhsh et al, 2001;Sánchez-Martin et al, 2014). Other empirical FDI studies, however, normalize by country-year-specific population and use FDI (net or gross) per capita as the dependent variable (e.g., Chakrabarti, 2001;Harms and Ursprung, 2002;Kinoshita and Campos, 2003;Schneider and Frey, 1985).…”

Section: Normalization Of the Dependent Variablementioning

confidence: 99%

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Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?

Akhtaruzzaman

Berg

Hajzler

2017

European Journal of Political Economy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. ii Terms of use: Documents in EconStor may AbstractPreviously reported effects of institutional quality and political risks on foreign direct investment (FDI) are mixed and, therefore, difficult to interpret. We present empirical evidence suggesting a relatively clear, statistically robust, and intuitive characterization. Institutional factors that affect the likelihood of an abrupt and total loss of foreigners' capital (i.e., return of capital) dominate those that affect rates of return conditional on a strictly positive terminal investment value (i.e., return on capital). A one-standarddeviation reduction in expropriation risk is associated with a 72 per cent increase in FDI, which is substantially larger than the effects of any other dimensions of institutional quality simultaneously controlled for in our empirical models of FDI inflows. This evidence is consistent with the predictions of a standard theory of FDI under imperfect contract enforcement. We show in the context of a simple model with endogenous expropriation that, when there is a binding threat of expropriation, foreign investors can become unresponsive to differences in other dimensions of institutions and political risk, and may even reduce optimal investment as these institutions improve. Bank topics: Development economics, International financial markets JEL codes: D23, F21, F23 RésuméLes effets signalés antérieurement qu'exercent la qualité des institutions et les risques politiques sur l'investissement direct étranger (IDE) sont contrastés et, par conséquent, difficiles à interpréter. Nous présentons des données empiriques qui font ressortir une caractérisation intuitive statistiquement solide. Les facteurs institutionnels ayant une incidence sur la probabilité d'une perte soudaine et totale du capital détenu par des étrangers (remboursement de capital) l'emportent sur ceux touchant les taux de rendement subordonnés à une valeur nue finale strictement positive (rendement du capital investi). Une réduction de un écart-type du risque d'expropriation est associée à une augmentation de 72 % de l'IDE, une hausse nettement supérieure à celles engendrées par n'importe quels autres aspects de la qualité des institutions pris en compte simultanément dans nos modèles empiriques d'entrées d'IDE. Ce résultat cadre avec les prédictions d'une théorie classique de l'IDE où l'exécution des contrats est imparfaite. Dans un modèle simple intégrant un facteur d'expropriation endogène, nous démontrons qu...

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Institutional determinants of FDI in Oman: Causality analysis framework

Ibrahim¹,

Devesh²,

Shaukat³

2020

Int. J Fin Econ

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This paper explores the institutional determinants of FDI in Oman and the role of FDI in enhancing Oman's economic diversification strategy. Time series data was collected for the selected institutional factors influencing FDI during the period 1996–2018. Unit root and Granger causality framework were used in the analysis. Results indicated that strong and clear property rights protection, corruption freedom, fiscal and trade freedom, cause FDI inflows in Oman, whereas business freedom had no effects. It is crucial for policy makers in Oman to strengthen these institutional factors, craft and implement a policy framework to sustain their efficacy, while improving business freedom towards an open economic model. This also includes strengthening the legal framework, combating corruption and reducing subsidies and other forms of favouritism towards state‐owned enterprises. Such policy measures, aimed at channelling FDI flow towards targeted sectors, would enhance Oman's diversification strategy and foster economic growth and development.

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Do changes in the rules of the game affect FDI flows in Latin America? A look at the macroeconomic, institutional and regional integration determinants of FDI

Cited by 52 publications

References 38 publications

Assessment of Factor Influencing Attraction of Foreign Direct Investment to Developing Economies

Assessment of Factor Influencing Attraction of Foreign Direct Investment to Developing Economies

Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?

Institutional determinants of FDI in Oman: Causality analysis framework

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