Three chapters on foreign direct investment in OECD countries

Abstract

This thesis comprises of three essays dealing with the effect of FDI on the economies of the host country and the relationship between institutional quality and FDI inflows to OECD economies. Chapter 2 assesses the impact of FDI inflows on economic growth and domestic investment in a panel of OECD countries during the period of 1990-2017 by utilizing the method of fixed-effects and system GMM. The findings show that FDI inflows are positively and significantly associated with the economic growth of the host economy. When considering the origin of FDI, we find that FDI from developed countries contributes to the growth rate in the receiving economy, while FDI from developing countries shows no significant effect. Importantly, FDI does not appear to crowd in or out domestic investment. Only FDI from developed countries is associated with crowding in of domestic investment. Chapter 3 examines the impact of inward FDI flows in three sectors -- primary, manufacturing and services -- on economic growth in a panel of OECD countries during the 1996-2017 period. We find that FDI inflows into the manufacturing and service sectors are positively and significantly associated with economic growth, with the size of the growth-promoting effect in the manufacturing sector being generally higher than that in the service sector. In contrast, we find no evidence of a growth-promoting effect of FDI in the primary sector. We also examine the effect of FDI inflows into these three sectors on the host country’s domestic investment and find evidence of a crowding-in effect of FDI flows in the manufacturing and service sectors whereas crowding-out effect has been found in the primary sector. The main purpose of Chapter 4 is to investigate the effect of institutional quality on FDI inflows. The results reveal that institutional quality is an important factor attracting foreign direct investment (FDI) over the long term to countries with low quality of institutions. In the short term, in contrast, the relationship is not significant. Institutional quality does not play any significant role in attracting FDI to the countries with sound institutions in either long or short terms. When considering components of institutional quality, property rights have the greatest impact on FDI flows. Finally, when considering a non-linear relationship between institutional quality and FDI inflows, we find diminishing returns of institutional quality on FDI flows for the whole sample.