FDI and the costs of contract enforcement in developing countries

• Published in: Policy sciences Vol. 43; no. 2; pp. 181 - 200
• Main Authors: Ahlquist, John S., Prakash, Aseem
• Format: Journal Article
• Language: English
• Published: Boston Springer 01.06.2010; Springer US; Springer Nature B.V
• Subjects: Agreements; Capital markets; Contract enforcement; Contract management; Contracts; Cost; Costs; Cross-national analysis; Developing Countries; Economic costs; Economic globalization; Economic growth; Economic Policy; Enforcement; Foreign direct investment; Foreign Investment; Foreign investments; Global economy; Globalization; Host countries; Host country; Incentives; International business enterprises; International economic relations; International financial institutions; Law enforcement; LDCs; Liability; Markets; Multinational Corporations; Multinational enterprises; Political Science; Political Science and International Relations; Political Science and International Studies; Polities; Public Administration; Public good; Studies; Variable costs; World Bank; Globalization; Foreign investment; Contract enforcement
• ISSN: 0032-2687; 1573-0891
• DOI: 10.1007/s11077-009-9093-3

This article examines the relationship between foreign direct investment and host countries' contracting institutions, the rule systems which govern commercial transactions between private actors. Given their liability of foreignness and costly exit options, we suggest that multinational corporations have incentives to influence the formal contracting environment in host countries. Further, host governments are more likely to respond to multinationals' wishes when they are more dependent on foreign capital markets. We draw on the World Bank's Lex Mundi dataset (Djankov et al. 2003) on microlevel contracting environment for private actors. Our analysis of a cross section of 98 developing countries suggests that FDI is associated with lower contract enforcement costs, particularly when the host country is more indebted.