Elsevier

World Development

Volume 38, Issue 12, December 2010, Pages 1678-1691
World Development

Human Development and Foreign Direct Investment in Developing Countries: The Influence of FDI Policy and Corruption

https://doi.org/10.1016/j.worlddev.2010.04.005Get rights and content

Summary

While policymakers place great importance on foreign direct investment (FDI) in advancing development in developing countries, the links between FDI, economic development, and human development remain tenuous. We attempt to better understand these relationships by looking at the influence of FDI policy and corruption on these relationships. We find that FDI inflows are more strongly positively related to improvement in human development when FDI policy restricts foreign investors from entering some economic sectors and when it discriminates against foreign investors relative to domestic investors. The relationship between FDI and improvement in human development is also more strongly positive when corruption is low.

Section snippets

INTRODUCTION

In recent years, developing countries have increasingly relied on private capital as a source of funding. Since the early 1990s, private sources of funding have made up over 75% of their external capital flows. The major contributing group to this private capital has consistently been foreign direct investment (FDI), with its share going from less than 30% in the early 1990s to nearly two-thirds of the total by 1998 (UNCTAD, 2003). While there was a decrease in FDI in the first few years of the

The role of FDI in economic development

From a neo-classical economic perspective, FDI from developed countries is deemed an integral ingredient to the economic growth of underdeveloped countries, and economic development is best served when the state plays a limited role in controlling the market (Caves, 1996, Hymer, 1976, Kindleberger and Herrick, 1977, Todaro, 1989, Vernon, 1966). It is argued that developing countries benefit directly from FDI through an inflow of capital, tax revenues, and employment, and indirectly through

Sample

Our sample consists of a panel data set from 49 developing countries over the time period of 1980–2005, which allows us to control for unobserved sources of country differences. Due to some missing dependent variable data during this period for some countries, our maximum number of data points is 904. Throughout the sample period, we have some missing data on the independent variables, which reduce our data set for each model differently.

Our sample focuses on lesser developed countries because

ANALYSIS AND RESULTS

All explanatory and control variables are lagged 1–4 years, reducing concerns of reverse causality and avoiding simultaneity. The panel is unbalanced as some countries had missing values during the window of observation.

We estimate our models using panel linear regression with country fixed effects to control for all unobserved, temporally stable country differences. By using a fixed effects model, it is unnecessary to control for specific country level factors that do not vary across time in

DISCUSSION

The effect of FDI on economic growth in developing countries is an important question and has been widely studied. While policymakers strongly believe that FDI is an important element in economic growth, past empirical studies are divided on how important FDI really is. It has been argued that this lack of consensus is partly due to inadequate methodologies, which has shifted the field to use panel studies, a model that can more adequately address this research question. A second explanation

Acknowledgments

We are grateful to Angela M. Smith and three anonymous reviewers for World Development for their helpful suggestions and guidance on earlier drafts of this paper. For funding this research, I would like to thank the Hess and Lenfest families for their support of faculty summer research at Washington and Lee University.

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