Foreign Direct Investment, Regulations and Growth

Abstract

The paper explores the linkage between income growth rates and foreign direct investment (FDI) inflows. So far the evidence is rather mixed, as no robust relationship between FDI and income growth has been established. We argue that countries need a sound business environment in the form of good government regulations to be able to benefit from FDI. Using a comprehensive data set for regulations, we test this hypothesis and find evidence that excessive regulations restrict growth through FDI only in the most regulated economies. This result is robust to different specifications of the econometric model. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd.

Foreign direct investment, regulations and growth in sub-Saharan Africa

“…Due to inadequate savings and liquidity constraints in developing countries, the inflows of FDI is seen as an important source of new capital injection and also additional investment in both human and physical capital (Busse and Groizard, 2008). FDI is expected to directly affect growth through the increase in the stock of capital in the host countries and also indirectly through human capital development and the advances in technology that may come along with it (de Mello, 1999).…”

“…Gui-Diby (2014) examined the relationship between FDI, domestic investment, and growth and the direction of causality for 50 African countries during 1980(divided into two periods: 1980-1994) and Agbloyor et al (2014 looked at the moderating role of financial market development on the capital flowsgrowth nexus for 14 African countries over an 18 year period (1990-2007). Our study is different from these studies as it controls for the regulatory regime in support of the hypothesis that the policy environment, particularly the regulatory infrastructure matters for the impact of capital inflows (Busse and Groizard, 2008;Global Development Finance, 2013).…”

Regulation, trade and economic growth

“…that countries with low-quality institutions (bottom 20 or 30 per cent) cannot reap the benefits of increase trade, with regulatory quality (e.g., labor market, market entry and tax system efficiency/tax level) playing a more important role than good governance. In a slightly broader context of integration, Busse and Groizard (2008) use the Doing Business Indicators to find that countries with excessive business and labor regulations cannot benefit from FDI as much as countries with relatively low regulatory burdens 4 .…”

Factors Influencing Foreign Direct Investment Inflow in Tanzania

“…Among other international agreements and membership, Tanzania is a member of Multilateral Investment Guarantee Agency (MIGA) and International Centre for Settlement of Investment Disputes (ICSID) (Tanzania Investment centre, 2012). Busse and Groizard (2008) stated that as compared to the less regulated countries, the more regulated economies are less able to take advantage of the presence of multinational companies. This result is further evidence of the fact that important host country characteristics can lead to a positive impact of foreign investment inflows on growth rates.…”