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GTAP Resource #1694

"FDI, Regulations and Growth"
by Busse, Matthias and Jose Luis Groizard

The economic benefits of increasing FDI inflows, in particular in developing countries, are well known in the theoretical literature: FDI will augment the capital stock of the host country, introduce new technologies, increase competition within key sectors of the economy, and benefit local workers through more and better paid jobs. Yet empirical studies found little support that FDI is significantly boosting growth rates. Curiously, there are only two studies that try to explain why there are no statistically significant linkages between FDI and economic development: First, Borensztein et al. (1998) found that educational attainment in the host countries may play an important role, that is, countries need a certain educational threshold level to benefit from FDI.

Second, Alfaro et al. (2004) examined the linkages between the effectiveness and regulations of financial markets, FDI and growth. They found that countries with better financial systems can exploit FDI more efficiently and achieve a higher growth rate. Yet they limited their empirical analysis to highly specialised indicators for financial market regulations.

Apart from these financial market regulations, the impact of broader government regulations on the interaction between FDI and growth has not been analysed so far. Our paper intends to analyse the linkages between indicators for government regulations, FDI and economic growth in a comprehensive manner. More specifically, we will employ the extensive Doing Business database on government regulations, provided by the World Bank, which focuses on relatively consistent and objective data in measuring regulations across countries.

We find that FDI does not stimulate growth in economies with excessive business and labour regulations, after controlling for some other relevant determinants of observed changes in GDP growth rates. More explicitly, the effects of starting and closing down a business, labour market regulations, registering property, protecting investors and obtaining credit are examined. These forms of regulations are likely to affect the reallocation of resources and, consequently, the positive effects of FDI inflows in an economy. Excessive regulations are likely to restrict growth through FDI because resources are prevented from moving into the most productive sectors and/or host countries cannot exploit technology spillovers from FDI.

Resource Details (Export Citation) GTAP Keywords
Category: 2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Busse, M. (4/26/2005)
Updated: Batta, G. (5/31/2005)
Visits: 1,947
No keywords have been specified.

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