On the Role of Projected FDI Inflows in Shaping Institutions: The Longer-Term Plan for Post-Pandemic Investment Reboot

28 Pages Posted: 15 Jan 2021

See all articles by Xiang Gao

Xiang Gao

Shanghai Business School - Research Center of Finance

Zhenhua Gu

Shanghai Business School

Kees Koedijk

TIAS School of Business and Society, Tilburg University

Date Written: December 30, 2020

Abstract

Capital inflows have a strong presence that influences destination countries’ development of institutions, which can in turn help resuscitate a stopped economy and re-attract capital that was lost during crises such as the recent public health crisis. While the previous literature emphasizes the mechanism that foreign investors press or even threaten the local government for change, this paper explores empirically whether institutional improvement can be achieved through the channel that host countries voluntarily reform institutions in anticipation of potential investments predicted by the exogenous geographical and cultural
characteristics of the recipient countries. Given that countries with better institutional quality can accumulate larger FDI stocks, we still find that the need for more FDI, in contrast to FPI and debt, gives higher incentives to host countries to strategically improve their institutions before seeking capital overseas. Moreover, the predicted FDI exerts more prominent impacts on institutions on constraining elite than those involved in launching a business, enforcing contracts, and protecting properties. The results imply that a long-run plan for upgrading elite constraint institutions is crucial for a post-pandemic FDI reboot.

Keywords: Foreign Direct Investment, Foreign Portfolio Investment, Debt Investment, Legal Institutions, Contract Enforcement, Executive Constraints, Property Rights

JEL Classification: E02, F21, F34, F40, P48

Suggested Citation

Gao, Xiang and Gu, Zhenhua and Koedijk, Kees, On the Role of Projected FDI Inflows in Shaping Institutions: The Longer-Term Plan for Post-Pandemic Investment Reboot (December 30, 2020). East Asian Economic Review Vol. 24, No. 4 (December 2020) 441-468, , https://dx.doi.org/10.11644/KIEP.EAER.2020.24.4.387, Available at SSRN: https://ssrn.com/abstract=3766694 or http://dx.doi.org/10.2139/ssrn.3766694

Xiang Gao (Contact Author)

Shanghai Business School - Research Center of Finance ( email )

Shanghai
China

Zhenhua Gu

Shanghai Business School ( email )

2271, Zhongshan Road (W)
Hong Kou District
Shanghai, 200235
China

Kees Koedijk

TIAS School of Business and Society, Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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