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ABSTRACT
The relationship between Foreign Direct Investment (FDI) and economic growth in developing countries has received considerable attention in development literature during recent decades. However, little interest has been devoted to the simultaneous role of institutions (in particular, the role of property rights and rule of law) and the stock of human capital. This paper tries to fill that gap, by using an innovative econometric methodology to empirically test the relationship between FDI and economic growth in the context of 50 African, and East and South East Asian countries covering the period of 1965-85. We emphasize the growth-effects of FDI that depends on the stock of human capital and the quality of institutions that protect property rights and ensure that contracts are enforced. We found that financial institutions and political institutions such as property rights play the same role in reducing transaction costs.
Keywords: Foreign direct investment; Economic growth; human capital, legal system
INTRODUCTION
Tremendous differences in incomes and standards of living exist today between rich and poor countries of the world. Explaining the huge difference in average incomes between the world's richest and poorest nations is one of the most fundamental issues in development economics. The past decade has witnessed a dramatic increase in economic growth of East and South East Asian countries (ESEA). East Asia has a remarkable record of high and sustained economic growth. From 1965 to 1990 the twenty-three economies of East Asia grew faster than all other regions in the world. Most of this achievement is attributable to seemingly miraculous growth in just eight economies: Japan; the «Four Tigers» (Hong Kong, The Republic of Korea, Singapore, and Taiwan); China; and the three newly industrialized economies (NIEs) of South East Asia, Indonesia, Malaysia, and Thailand. Since 1960, these Asian economies have grown more than twice as fast as the rest of East Asia, roughly three times as fast as Latin America and South Asia and five times faster than Sub-Saharan Africa. They also significantly outperformed the industrial economies and the oil-rich Middle East-North Africa region. Between 1960 and 1985, real income per capita increased more than four times in Japan and the Four Tigers and more than double in Southeast Asian NIEs (see The World Bank, 1993, pp. 2)....