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RESEARCH AND ANALYSIS:  WORKING PAPERS
The Impact of Transparency on Foreign Direct Investment

Non-transparency is a term given in this paper to a set of government policies that increase the risk and uncertainty faced by economic actors foreign investors. This increase in risk and uncertainty stems from the presence of bribery and corruption, unstable economic policies, weak and poorly enforced property rights, and inefficient government institutions.

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No: ERAD-99-02

Authors:

  • Zdenek Drabek, 
    WTO

  • Warren Payne, 
    Economic Consulting Services, Inc.
    Washington, D.C.

Manuscript date:  August, 1999

 
Abstract
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Non-transparency is a term given in this paper to a set of government policies that increase the risk and uncertainty faced by economic actors foreign investors. This increase in risk and uncertainty stems from the presence of bribery and corruption, unstable economic policies, weak and poorly enforced property rights, and inefficient government institutions. Our empirical analysis shows that the degree of non-transparency is an important factor in a country's attractiveness to foreign investors. High levels of non-transparency can greatly retard the amount of foreign investment that a country might otherwise expect. The simulation exercise presented in the statistical part of this paper reveals that on average a country could expect 40 percent increase in FDI from a one point increase in their transparency ranking. Pari passu, non-transparent policies translate into lower levels of FDI and hence lower levels of welfare and efficiency in the host country's economy. A nation that takes steps to increase the degree of transparency in its policies and institutions could expect significant increases in the level of foreign investment into their country. This increased investment translates into more resources, which in turn increases social welfare and economic efficiency.
 

Key Words Back to top

Foreign direct investment, transparency, corruption, FDI modeling.
 

JEL Classification No. 

[F02] [F13] [F21] [F23] [M14]
 

Disclaimer Back to top

This is a working paper, and hence it represents research in progress. This paper represents the opinions of individual staff members or visiting scholars, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the authors. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Analysis Division, World Trade Organization, rue de Lausanne 154, CH-1211 GenÚve 21, Switzerland. Please request papers by number and title.

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