DP7533 Does Public Governance Always Matter? How Experience of Poor Institutional Quality Influences FDI to the South

Author(s): Julia Darby , Rodolphe Desbordes , Ian Wooton

Publication Date: November 2009

Keyword(s): Institutions , Public governance , South-South FDI

JEL(s): F23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP7533.asp

This paper investigates whether the higher prevalence of South multinational enterprises (MNEs) in risky developing countries may be explained by the experience that they have acquired of poor institutional quality at home. We confirm the intuitions provided by our analytical model by empirically showing that the positive impact of good public governance on foreign direct investment (FDI) in a given host country is moderated significantly, and even in some cases eliminated or reversed, when MNEs have had prior experience of poor institutional quality at home. In contrast, MNEs with little experience are deterred much more by bad public governance conditions than could have been inferred from an unconditional estimation of the effects of public governance on FDI.