Foreign Direct Investors as Agents of Economic Transition: An Instrumental Variables Analysis

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Previous empirical analysis has noted a correlation between Foreign Direct Investment (FDI) and economic reformin Eastern Europe and the Former Soviet Union, but has attributed the relationship to investors rewarding countries after reform decisions. Little attention has been paid to the fact that investors' lobbying efforts may actually influence reform choices. This paper finds a positive effect of FDI on reform progress through apanel analysis of investor influence in 27 transition states (1991-2004). To address endogeneity bias, the exogenous portion of a country's exchange rate movement is used as an instrument in a two-stage procedure. The underlying counterfactual comparison that results from this approach is between two similarly situated countries, but where one country experienced a large shift in the share of FDI in its economy as a result of changes in the international economy and the other did not. Further analysis reveals that the relationship is particularly strong in the manufacturing and service sectors, but does not hold for construction, utilities, or natural resource based projects. © 2009 E. J. Malesky.





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Malesky, EJ (2009). Foreign Direct Investors as Agents of Economic Transition: An Instrumental Variables Analysis. Quarterly Journal of Political Science, 4(1). pp. 59–85. 10.1561/100.00008068 Retrieved from

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Edmund Malesky

Professor of Political Science

Malesky is a specialist on Southeast Asia, particularly Vietnam. Currently, Malesky's research agenda is very much at the intersection of Comparative and International Political Economy, falling into three major categories: 1) Authoritarian political institutions and their consequences; 2) The political influence of foreign direct investment and multinational corporations; and 3) Political institutions, private business development, and formalization.

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