In this paper, we contribute to the literature on the determinants of foreign direct investment in developing countries and re-evaluate the role of the quality of institutions on FDI independently of the general level of development. We implement cross-section estimations based on a newly available database with unprecedented detail on institutions for a set of 52 countries, as well as panel data estimations based on Fraser Institute's data. Furthermore, we control for the correlation between institutions and GDP per capita and for endogeneity of institutions. Finally, we evaluate whether the similarity of institutions between the host and the origin country raises bilateral FDI. We find that a wide range of institutions, including bureaucracy, corruption, but also information, banking sector and legal institutions, do matter for inward FDI independently of GDP per capita. Interestingly, weak capital concentration and strong employment protection tend to reduce inward FDI. Institutional proximity between the origin and the host country also matters, but we find little impact of institutions in the origin country. These results are encouraging in the sense that efforts towards raising the quality of institutions and making them converge towards those of source countries may help developing countries to receive more FDI, independently of the indirect impact of higher GDP per capita. The orders of magnitude found in the paper are large, meaning that moving from a low level to a high level of institutional quality could have as much impact as suddenly becoming a neighbour of a source country.

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Institutional Determinants of Foreign Direct Investment

It is often argued that a high level of central-band independence coupled with an explicit mandate that the bank aim for price stability are important institutional devices for maintaining that stability. Indeed, a number of countries have recently increased the independence of their central banks in order to raise their commitment to price stability.

The Political Economy of Central-Bank Independence

The literature on optimal currency areas identifies the symmetry of disturbances and the speed with which economies adjust as key criteria affecting the decision of whether to form a monetary union. This paper uses structural vector autoregression techniques to examine these issues for three regions: Western Europe, the Americas, and East Asia. The results suggest three country groupings that best satisfy these criteria: Northern Europe (Germany, France, the Netherlands, Belgium, Denmark, Austria, and possibly Switzerland); Northeast Asia (Japan, Taiwan, and Korea); and Southeast Asia (Hong Kong, Singapore, Malaysia, Indonesia, and possibly Thailand).

One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World

The Effectiveness of Central-Bank Intervention: A Survey of the Literature After 1982

Corruption is a threat to democracy and economic development in many societies. It arises in the ways people pursue, use and exchange wealth and power, and in the strength or weakness of the state, political and social institutions that sustain and restrain those processes. Differences in these factors, Michael Johnston argues, give rise to four major syndromes of corruption: Influence Markets, Elite Cartels, Oligarchs and Clans, and Official Moguls. In this 2005 book, Johnston uses statistical measures to identify societies in each group, and case studies to show that the expected syndromes do arise. Countries studied include the United States, Japan and Germany (Influence Markets); Italy, Korea and Botswana (Elite Cartels); Russia, the Philippines and Mexico (Oligarchs and Clans); and China, Kenya, and Indonesia (Offical Moguls). A concluding chapter explores reform, emphasising the ways familiar measures should be applied - or withheld, lest they do harm - with an emphasis upon the value of 'deep democratisation'.

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Syndromes of Corruption: Wealth, Power, and Democracy

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Does Foreign Direct Investment Decrease Corruption

This paper describes G-3 exchange rate volatility and evaluates its impact on developing countries. The paper presents empirical evidence showing that G-3 exchange rate volatility has a robust and significantly negative impact on developing countries’ exports. A one percentage point increase in G-3 exchange rate volatility decreases real exports of developing countries by about 2 per cent, on average. G-3 exchange rate volatility also appears to have a negative influence on foreign direct investment to certain regions, and increases the probability of occurrence of exchange rate crises in developing countries. These results imply that greater stability in the international exchange rate system would help improve trade and foreign direct investment prospects for developing countries – and would help prevent currency crises.

Felipe Larraín B.

Papers

Does Foreign Direct Investment Decrease Corruption

The Impact of G-3 Exchange Rate Volatility on Developing Countries

Exchange-rate policy in emerging-market economics : the case for floating

Can swaps solve the debt crisis? : lessons from the Chilean experience

La transformación económica de Chile