Skip to main content

Advertisement

SpringerLink
Log in

Business start-up regulations and the complementarity between foreign and domestic investment

  • Original Paper
  • Published:
Review of World Economics Aims and scope Submit manuscript

Abstract

This paper shows that the complementarity between foreign direct investment (FDI) and domestic investment significantly depends on regulations required to start a new domestically owned business in host economies. It finds evidence that FDI crowds out domestic investment in countries with entry regulation cost above a certain level, and many of these countries are in the bottom quartile of GDP per capita. Reforms in business start-up regulations can therefore play a critical role in enhancing the complementarity between foreign and domestic investment and thereby increase entrepreneurship and economic growth in low-income countries. The analysis takes into account other significant factors which affect domestic investment such as the cost of capital, government’s economic growth track record, institutional quality, and market size.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. In the empirical growth literature, domestic investment is considered to be one of the important determinants of economic growth (see for example Levine and Renelt 1992).

  2. To be consistent with the estimation procedure, summary data for domestic investment are for the period 2005–2010, and summary data for explanatory variables are for the period 2000–2004.

  3. These countries are: Lesotho, Moldova, Tanzania, Lao PDR, Senegal, Madagascar, India, Mauritania, Mongolia, and Vietnam.

  4. These countries are: Sri Lanka, Botswana, Guyana, Croatia, Iran, Islamic Rep., Jordan, Thailand, Algeria, Indonesia, Honduras, Albania, Lebanon, Kazakhstan, Latvia, Romania, Bulgaria, Nicaragua, Estonia, Morocco, Belarus, Armenia, China, and Bhutan.

  5. These countries are: Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Congo, Dem. Rep., Eritrea, Ethiopia, Ghana, Guinea, India, Kenya, Kyrgyz Republic, Lao PDR, Lesotho, Madagascar, Malawi, Mali, Mauritania, Moldova, Mongolia, Mozambique, Nepal, Rwanda, Senegal, Sierra Leone, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia, and Zimbabwe.

  6. The countries are: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cambodia, Cameroon, Central African Republic, Chad, Congo, Dem. Rep., Congo, Rep., Cote d'Ivoire, El Salvador, Eritrea, Ethiopia, Guinea, Guyana, Indonesia, Lebanon, Malawi, Mali, Mauritania, Nicaragua, Paraguay, Rwanda, Senegal, Sierra Leone, Tanzania, Togo, Uganda, Yemen, Rep., and Zimbabwe.

References

  • Aghion, P., Blundell, R., Griffith, R., Howitt, P., & Prantl, S. (2009). The effects of entry on incumbent innovation and productivity. The Review of Economics and Statistics, 9(1), 20–32.

    Article  Google Scholar 

  • Agosin, M., & Machado, R. (2005). Foreign investment in developing countries: Does it crowd in domestic investment? Oxford Development Studies, 33(2), 149–162.

    Article  Google Scholar 

  • Borensztein, E., De Gregorio, J., & Lee, J.-W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115–135.

    Article  Google Scholar 

  • De Mello, L. (1999). Foreign direct investment-led growth: Evidence from time series and panel data. Oxford Economic Papers, 51(1), 133–151.

    Article  Google Scholar 

  • Djankov, S., Ganser, T., McLiesh, C., Ramalho, R., & Shleifer, A. (2010). The effect of corporate taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics, 2(3), 31–64.

    Google Scholar 

  • Djankov, S., La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, CXVII, 1, 1–37.

    Article  Google Scholar 

  • Fan, J., Morck, R., Xu, L., & Yeung, B. (2009). Institutions and foreign direct investment: China versus the rest of the world. World Development, 37(4), 852–865.

    Article  Google Scholar 

  • Freund, C., & Bolaky, B. (2008). Trade, regulations, and income. Journal of Development Economics, 87(2), 309–321.

    Article  Google Scholar 

  • Gough, J. (1969). The rise of the entrepreneur. New York: Schocken Books.

    Google Scholar 

  • Heston, A., Summers, R., & Aten, B. (2012). Penn world table version 7.1, center for international comparisons of production, income and Prices at the University of Pennsylvania.

  • Kim, D., & Seo, J. (2003). Does FDI inflow crowd out domestic investment in Korea? Journal of Economic Studies, 30(6), 605–622.

    Article  Google Scholar 

  • Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82(3), 591–629.

    Article  Google Scholar 

  • Lederman, D., Mengistae, T., & Xu, L. (2013). Microeconomic consequences and macroeconomic causes of foreign direct investment in Southern African economies. Applied Economics, 45(25), 3637–3649.

    Article  Google Scholar 

  • Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions. American Economic Review, 82(4), 942–963.

    Google Scholar 

  • Lipsey, R. (2000). Interpreting developed countries’ foreign direct investment. (NBER Working Paper 7810). Cambridge, MA: National Bureau of Economic Research.

  • Naude, W. (2010). Promoting entrepreneurship in developing countries: Policy challenges. (UNU-WIDER Policy Brief 4). University of United Nations: World Institute of Development Economics Research.

  • Ndikumana, L. (2000). Financial determinants of domestic investment in Sub-Saharan Africa: Evidence from panel data. World Development, 28(2), 381–400.

    Article  Google Scholar 

  • Oshikoya, T. (1994). Macroeconomic determinants of domestic private investment in Africa: An empirical analysis. Economic Development and Cultural Change, 42(3), 573–596.

    Article  Google Scholar 

  • World Bank. (2012a). World development indicators (WDI). www.data.worldbank.org.

  • World Bank. (2012b). World wide governance indicators. www.data.worldbank.org.

  • World Bank. (2012c). Doing business. Accessed at www.doingbusiness.org.

  • World Bank. (2012d). Enterprise surveys. Accessed at www.enterprisesurveys.org.

  • World Bank. (2004a). World development report 2005: A better investment climate for everyone. Washington, DC: World Bank and Oxford University Press.

    Book  Google Scholar 

  • World Bank. (2004b). Doing Business in 2004: Understanding Regulation. Washington, DC: World Bank and Oxford University Press.

    Google Scholar 

  • World Bank. (2009). Economic partnership agreements between Africa and the European Union: What to do now?. Washington, DC: World Bank.

    Google Scholar 

  • Xu, L. (2011). The effects of business environments on development: Surveying new firm-level evidence. The World Bank Research Observer, 26(2), 310–340.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Salisbury University, Salisbury, MD, 21801, USA

    Jonathan Munemo

Authors
  1. Jonathan Munemo
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jonathan Munemo.

About this article

Cite this article

Munemo, J. Business start-up regulations and the complementarity between foreign and domestic investment. Rev World Econ 150, 745–761 (2014). https://doi.org/10.1007/s10290-014-0189-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10290-014-0189-2

Keywords

JEL classification

Search

Navigation