International Business Review 28 (2019) 415–427

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International Business Review

journal homepage: www.elsevier.com/locate/ibusrev

The impact of regulations on the FDI-growth nexus within the institution- T

based view: A nonlinear specification with varying coefficients
Elena Kettenia, Constantina Kottaridib,
⁎

a
School of Economic Sciences and Administration, Frederick University, 7, Y. Frederickou Street, Pallouriotisa, Nicosia, 1036, Cyprus
b
Department of Economics, University of Piraeus, Karaoli & Dimitriou 80, 18534 Piraeus, Greece

ARTICLE INFO ABSTRACT

JEL classification: The impact of Multinational Enterprise (MNE) activities on economic development and poverty reduction
C14 constitute a specific field of study within International Business (IB) scholarship during the last decade.
L51 Extending the institution-based view that “institutions matter”, we shift the focus of interest on the effect of
O43 institutions in the FDI-growth nexus which, surprisingly, have been overlooked by respective literature. A
O47
profound understanding of the FDI impact on economic growth cannot neglect institutions that shape the macro
G28
environment where MNEs operate. Within this rationale, this paper examines the effect of FDI on growth under
Keywords: different formal institutions placing emphasis to credit and labour market regulatory systems in both advanced
FDI
and developing countries. Most empirical studies stemming mainly from the economics perspective, assume that
Institutions
the FDI growth effect is linear and incorporate specific functional forms for their regression relationships. We
MNEs
Regulation rely on more advanced econometric methods that allow for the regression coefficients to vary as smooth
Labour market functions of other variables, allowing for more plausible empirical results. Our findings strongly support our
Credit liberalisation suggestion that the host institutional context shape the strategies, structures and competitiveness of MNEs’
Growth activities which they then affect differently economic growth. We thus provide useful insights regarding the
long-lasting debate on the FDI-growth nexus.

1. Introduction
Foreign Direct Investment (FDI) is considered a bundle of resources,
both tangible and intangible, that are transferred across borders and
spillover to the domestic economy generating growth. The impact of
Multinational Enterprise (MNE) activities on economic development
and poverty reduction constitute a specific field of study within
International Business (IB) scholarship during the last decade (Ghauri &
Yamin, 2009). Globalization and increasing liberalization have trans-
formed the context within which the developmental impact of inter-
national business activity needs to be considered (Buckley & Ghauri,
2004). It is by now acknowledged that positive effects from FDI are not
automatic (Yamin & Sinkovics, 2009) while some scholars claim that
relatively few countries have been successful in benefiting from FDI
(Dunning & Narula, 2004; Lall & Narula, 2004; Nunnenkamp, 2004;
Nunnenkamp & Spatz, 2004).
Extending the basic proposition that “institutions matter”, we shift
the focus of interest on the effect of institutions in the FDI-growth nexus
which, surprisingly, has been overlooked by respective literature. The
institution-based view posits that MNEs are largely affected by host
country institutions (Dunning & Lundan, 2008; Peng & Khoury, 2009;
Peng, Wang, & Jiang, 2008; Ramamurti & Doh, 2004). North (1990)
views institutions as “the rules of the game”, creating incentives and
restrictions through regulations that ‘shift the playing field favouring
some deals and opportunities while discouraging others’ (Mudambi &
Navarra, 2002: p. 636). Consequently, MNEs operate in diverse host
country environments and face very different sets of institutional con-
straints and opportunities; their decisions are thus largely affected by
the host institutional context, which in turn permits for diverse eco-
nomic effects in recipient economies. While IB has contributed much to
understanding how firms deal strategically with institutions, it misses
important ways in which institutions through their impact on MNEs’
decisions and strategies may affect host economic growth.
In this paper, we focus on formal institutions and include different
credit and labour regulatory regimes in our FDI-growth estimations to
identify whether such regulations enable or hinder the FDI spillover to
the domestic economy. There is a wide diversification between the level
of regulatory stringency among the countries; for example, Germany,
Finland and Greece are strongly labour regulated while the opposite
holds for Canada, UK and the US. Moreover, Hong-Kong, Nigeria and

⁎
Corresponding author.
E-mail addresses: bus.ke@frederick.ac.cy (E. Ketteni), kottarid@unipi.gr (C. Kottaridi).

https://doi.org/10.1016/j.ibusrev.2018.11.001
Received 13 February 2018; Received in revised form 2 October 2018; Accepted 1 November 2018
Available online 06 December 2018
0969-5931/ © 2018 Elsevier Ltd. All rights reserved.
E. Ketteni, C. Kottaridi
Malaysia are typical examples of labour deregulated developing OECD
countries, while Paraguay, Brazil and Venezuela lack behind. Moreover,
many European countries such as Portugal, Romania and Greece are
heavily credit regulated, while many countries that used to operate in
oligopolistic or monopolistic environment, turned to a very competitive
credit (deregulated) environment such as, for example, Denmark,
Sweden, New Zealand, China and Singapore.
In the economics literature, we find a revival of concerns regarding
regulatory policy formulation both in developed and developing
countries in recent years, as the nature of regulation has rapidly and
deeply changed (Katsoulakos, Makri, & Bageri, 2011). Interestingly,
while there is quite some empirical literature on the beneficial effect of
FDI on growth in more financially developed economies, no study to
date has addressed explicitly the FDI-growth nexus under different
credit regulation statuses. Simultaneously, recent structural reforms
proposed from formal entities such as the EU and OECD, include labour
market reformulation towards more flexibility. There is growing ac-
knowledgment among governments that labour market reforms are
necessary prerequisites for attracting FDI (Dewit, Goerg, & Montagna,
2009; Gross & Ryan, 2008; Walsh & Yu, 2010). Again, despite the large
literature on the effect of labour market reforms on FDI attraction, we
find paucity regarding the way labour market regulation regimes may
affect the FDI-growth relationship.
Existing empirical works on the FDI growth relationship suffer from
two major limitations. First, they assume that the FDI growth effect is
linear with only two works raising the issue of non- linearity (Ketteni,
Kottaridi, & Mamuneas, 2015; Kottaridi & Stengos, 2010). Second,
nearly all existing empirical studies assume specific functional forms for
their regression relationships. In other words, they adopt parametric
regression models with constant coefficients that often lead to mis-
specification of their functional form unless it is correctly specified by
economic theory (Tran & Tsionas, 2010). What is more, they are not
able to capture heterogeneous effects across units of investigation.
This work aspires to extend current literature in several ways.
Firstly, it combines recent trends in economic literature discussing the
role of regulations on economic growth with the institution-based ap-
proach in IB to provide new insights about channels through which
MNEs’ activities may spillover to host economies. Secondly, it utilizes a
non-parametric technique to uncover the shape of the FDI-growth re-
lationship (effect of FDI on growth) depending on varying regulation
regimes. In this way we identify these effects more explicitly and
broaden our understanding of the regulation-deregulation policy effect
on development and growth via MNEs’ strategies. Thirdly, it goes be-
yond existing literature in that it uses a large panel data set consisting of
66 countries split into developing and developed ones over the period
2000–2015, including the recent financial crisis; during this period
most countries have achieved a high degree of credit liberalization and
have also liberalized their labour markets to a certain extent, our results
may offer fruitful ground for further discussion on the deregulation
front. Fourthly, we investigate the impact of labour market flexibility as
a significant element of the host institutional context on the FDI-growth
nexus for the first time both in developed and developing countries.
Taken together, this set of findings is important in that it contributes to
greater understanding of routes through which MNEs’ strategies are
interlinked with host institutional context and are then translated to
beneficiary or not economic outcomes in the host market. In addition, it
provides useful managerial and state policy implications towards the
impact of specific institutional aspects such as credit and labour reg-
ulatory regimes on MNEs’ activities that spillover to the domestic
economy.
The remainder of the paper is organized as follows. Section 2 pro-
vides the review of the literature, while Section 3 describes the em-
pirical model, the semiparametric modeling approach and the dataset
used for the analysis. Section 4 discusses the empirical findings. Finally,
Section 5 encapsulates the concluding remarks together with some
policy implications.
416
International Business Review 28 (2019) 415–427
2. Literature review and conceptualization
Recent decades have witnessed the development of new in-
stitutionalism in social sciences (Hall & Soskice, 2001; March & Olsen,
1989; North, 1990; Oliver, 1997; Scott, 1995) hence the proposition
that “institutions matter” is by now well acknowledged. What remains
interesting and worth to explore (Davis, 1971; Peng et al., 2008; Smith,
2003) is how institutions matter. Institutions are studied within diverse
theoretical and methodological approaches in social science, such as
economics (Aoki, 2001; North, 1990), sociology (Powell & DiMaggio,
1991; Streeck & Thelen, 2005), and political science (Immergut, 1998;
Thelen, 1999). North (1990) suggests that institutions are the “rules of
the game”, while Scott (1995) talks about “regulative, normative, and
cognitive structures and activities that provide stability and meaning to
social behavior”. More recently, Morgan (2007) views institutions as
part of national business systems where different forms of capitalism
institutionalize particular economic rules of the game that shape the
strategies, structures and competitiveness of firms.
Institutions exist in distinct national configurations or types that
generate a particular systemic logic of economic action and competitive
advantages (Jackson & Deeg, 2008). Institutions may also be seen as
resources that influence the strategic development of firm-specific re-
sources and the likelihood of success of different corporate strategies
(Wan, 2005). Resources may be more “plentiful’’ or “deficient’’ in dif-
ferent country environments and create opportunities for firms to uti-
lize different types of firm-specific capabilities, such as competitive
market-based resources or nonmarket- based resources that strengthen
the internal or political capacity for control (Jackson & Deeg, 2008).
Institutions may enhance or hinder MNEs’ ability to access external
resources (Guler & Guillén, 2010), facilitate or disrupt knowledge ac-
cess (Meyer, Wright, & Pruthi, 2009), provide services and infra-
structure to foreign firms (McEvily & Zaheer, 1999), and stimulate or
harness business development (Uhlenbruck, Rodriguez, Doh, & Eden,
2006). In general, institutions are seen not only as constraints but also
as resources for solving key problems of economic coordination through
non-economic, value rational sets of commitments (Jackson & Deeg,
2008). Managers are, thus, called to make strategic decisions within a
specific institutional framework (Bruton, Dess, & Janney, 2007;
Chelariu, Bello, & Gilliland, 2006; Hill, 2007; Khanna & Palepu, 2000,
2006; Lee, Peng, & Barney, 2007), which vitally impacts on the costs of
using markets, such as the stock market (La Porta, Lopez-de-Silanes, &
Shleifer, 1999) or different forms of labour (Djankov, La Porta, Lopez-
de-Silanes, & Shleifer, 2002).1 Resource environments of countries are
differentiated according to the level of institutional infrastructure, such
as between developed and emerging economies, as well as between
institution-driven and factor driven emerging economies. In short, firm-
specific resources should “fit’’ the particular resource environments of a
host country.2
Indisputably, MNE activities, through risk-taking and pro-active
behaviour and use of organizational and country resources, form em-
bedded networks with other stakeholders and contribute to economic
development and growth through spillover effects (Birkinshaw & Hood,
1998; Blomstrom & Kokko, 1998; Dimitratos, Liouka, & Young, 2009;
Graham & Krugman, 1995; Lall, 1980; Young, Hood, & Dunlop, 1988).
Lall and Narula (2004) note that MNEs undertake complex activities
which require high levels of local competence in terms of robust sup-
port institutions among others. Various forms of entrepreneurial actions
are allied to economic development and growth in the host economy
(Acs & Storey, 2004; Audretsch & Keilbach, 2004; Braunerhjelm &
1
This is the central premise of transaction costs economics in understanding
how institutions impact on market behavior (Henisz & Williamson, 1999).
2
This perspective draws closely on the resource-based view (RBV) of the firm
(Barney, 1991), and links RBV with institutional theory (Wright, Filatotchev,
Hoskisson, & Peng, 2005).
E. Ketteni, C. Kottaridi
Borgman, 2004). Hence, entrepreneurial output stemming from MNE
activities may be essentially accompanied by new sets of institutions.
Such MNE subsidiary output can have significant spillover effects in the
local economy (Dunning & Lundan, 2008; Tavares & Young, 2005),
thereby justifying the subsidiary’s beneficial contribution to the eco-
nomic welfare in the host country.
Buckley and Ghauri (2004) suggest that MNEs are called to operate
within barriers and benefits shaped by globalization forces, viewed as a
conflict between markets and management. They identify three levels
of markets – financial markets, markets in goods and services and la-
bour markets. Regarding financial markets, though already very closely
integrated internationally, attempts at national regulation do persist
(Laulajainen, 2000) and the role of localities in the financial markets
still provides differentiation (Berg & Guisinger, 2001). Labour markets
are much differentiated at the national level (Buckley, Clegg, Forsans, &
Reilly, 2001).
Based on the above, we suggest that given the specific host reg-
ulatory framework, the effect of FDI on economic development and
growth within host economies may vary substantially even within the
same host country and across time, depending on the status of regula-
tions. This is because as reforms take place, MNEs adjust their activities
accordingly to circumvent any barriers arising or take advantage of new
opportunities. This effect, we suggest, is not monotonic but, on the
contrary, it is dynamic, changing constantly and forming an ongoing
causal effect between institutional context and MNE strategies.
In the empirical forefront, basically found in the economic per-
spective, the FDI growth literature is abundant, yet no consensus has
been reached so far on how FDI affects economic growth and to what
extent. Firm level studies often fail to conclude in favor of positive
growth effects (Aitken & Harrison, 1999; Haddad & Harrison, 1993),
while others reach mixed effects (Kokko, 1994; Kokko, Tansini, & Zejan,
1996). An affirmative positive affect is suggested in Blomström (1986).
The literature is much richer in the macroeconomic context. Positive
effects are attributed to Aizenman, Jinjarak, and Park (2013), Baldwin,
Braconier, and Forslid (2005), Bende-Nabende and Ford (1998),
Blomstrom, Lipsey, and Zejan (1992), Blomström, Kokko, and Zejan
(1994),3 De Gregorio (1992), Gui-Diby (2014), Seetanah (2009) and
Zhang (2001). Two country-wide studies contradict the majority of
macroeconomic evidence of a growth enhancing impact (Carkovic &
Levine, 2005; Durham, 2004), suggesting that findings must be viewed
skeptically. Another line of research points to a differential impact
between developed and developing countries (De Mello, 1999; Xu,
2000).
A parallel literature stream places emphasis on the beneficial role of
FDI in specific host environments. Among them, sufficiently developed
financial markets are showed to allow for positive externalities of FDI to
spur in to the domestic market, boosting productivity and growth.
Agbloyor, Abora, Adjasi, and Yawsonc (2014), Alfaro, Chanda, Kalemli-
Ozcan, and Sayek (2004), Caporale, Rault, Sova, and Sova (2014) and
Hermes and Lensink (2003) show that financial development interferes
significantly in the FDI–growth relationship; suggesting that only
countries with well-developed financial systems experience positive
growth effects of FDI.
On the above grounds, there is a new interest discussing the FDI
effect on growth given the regulatory framework, the degree of freedom
and quality of institutions domestically (Azman-Saini, Baharumshah, &
Law, 2010; Busse & Groizard, 2008; Du, Lu, & Tao, 2008; Slesman,
Baharumshah, & Wohar, 2015; Tarola, 2009). While the above-men-
tioned studies strongly support the view that “institutions matter” for
the FDI effect on growth, they do not opt to explain such effects within a
3
However, when they split their sample of developing countries into two
groups based on their level of income per capita they found that FDI was not
statistically significant for lower income developing countries although it re-
mained positive.
417
International Business Review 28 (2019) 415–427
strategic IB perspective; they rather focus on more generic economic
perspectives. We instead bring together the economic framework with
IB, to understand the mechanism through which beneficial or detri-
mental effects spur to host economies through MNEs’ decisions and
activities, given the host regulatory framework.
Interestingly, we find no study examining the effect of labour
market regulation on the FDI-growth nexus, though labour market
conditions are extensively discussed in the FDI attraction policy (Deeg,
2018). Labour market flexibility is considered a particular policy factor
for FDI attraction (Whyman & Baimbridge, 2006). The rationale poses
that labour market standards and regulations, or any limitation placed
on employment lead to labour market rigidity, which in turn imposes
costs on firms. Hence, a profit-maximizing firm is vitally affected by the
flexibility or rigidity of labour markets. In addition, flexible labour
markets enable firms to adjust to prevailing economic conditions, for
example limited lay-off rules, low closure cost, entry costs, worker
protection, etc. (Haaland & Wooton, 2002; Haaland, Wooton, & Faggio,
2003). Another strand of the literature asserts that a highly regulated
labour market may enhance labour relations and increase labour pro-
ductivity by providing job security and labour market standards. Em-
pirical evidence highly suggests a positive effect of labour legislation on
FDI attraction (Dewit et al., 2009; Gross & Ryan, 2008; Javorcik &
Spatareanu, 2005; Walsh & Yu, 2010) a limited or diminished im-
portance (Leibrecht & Scharler, 2009), or one that may be related to the
degree of flexibility (Parcon, 2008). More recently, Parcon (2008)
suggested a nonlinear relationship between labour market institutions
and FDI inflow.
Despite the above evidence, no study to date, according to the au-
thors’ knowledge, has explored the effect of FDI on growth under dif-
ferent labour market regulation regimes. This paper tries to remedy this
gap by investigating the existence of potential growth differential ef-
fects of FDI based on more or less stringent labour markets.
Last but not least, the present study includes also developing
countries in contrast to majority of studies addressing only developed
nations. Building a good regulatory regime is one of the most difficult
problems facing developing countries and transition economies.
Compared to developed nations, the objectives of regulation in devel-
oping countries are likely to be concerned with wider goals in order to
promote sustainable development and poverty reduction. Through this
lens, we expect a varying relationship between developed and devel-
oping countries.
3. Empirical model, estimation and data sources
3.1. Benchmark model
In our analysis, following the standard approach in the literature,
we allow for investment to be divided between its domestic and its
foreign direct component. In the same notion as Mankiw, Romer, and
Weil (1992) we assume a production function of the form:
Yt = Kta Ft (At Lt )1 a , where Y, K, F and L represent total output,
physical capital stock, FDI capital and labour respectively and A is a
technological parameter. L and A are assumed to grow exogenously at
rates n and , or Lt = L0 e nt and At = A0 e t . The number of effective
units of labour, At Lt , grows at rate n + .
By linearizing the transition path around the steady state (see
Kalaitzidakis, Mammumeas, Savvides, & Stengos, 2001), one can derive
the path of output per effective worker ( y = Y / AL ) between period T
and T + r as follows:
lnyT + r = lny * + (1 )lnyT
where = (1 e r ) , is the rate of convergence and y * is the steady
state level of output per effective worker. In order to derive the growth
of output per worker (Y/L), they substitute for the steady state of output
E. Ketteni, C. Kottaridi International Business Review 28 (2019) 415–427

per worker (lny * =alnk* + lnf * ), noting that the steady state levels of A semiparametric smooth coefficient model is given by:
physical capita per effective worker (k*) and FDI capital per effective
worker ( f * ) depend on the share of output devoted to physical capital yi = a (Zi ) + x i (Zi ) + ui = (1, x iT )
a (z i )
+ ui = XiT (Zi ) + ui,
accumulation (s k ), the share of output devoted to FDI capital (s f ), the (Zi )
growth of the effective labour force (n + ) and the depreciation rate
for capital ( ) . That is: where y denotes the dependent variable, x denotes a vector of variables
of interest; z denotes a vector of other exogenous variables and (z i ) is a
1
sk1 sf 1 a vector of unspecified smooth functions of zi. Based on Li, Huang, Li, and
k* = Fu (2002), the above semiparametric model has the advantage that it
n+ +
allows more flexibility in functional form than a parametric linear
1 model or a semiparametric partially linear specification. Furthermore,
ska s1f a 1 a the sample size required to obtain a reliable semiparametric estimation
f* =
n+ + is not as large as that required for estimating a fully nonparametric
model. It should be noted that when the dimension of z is greater than
Finally, the growth of output per worker between period T and one, this model also suffers from the "curse of dimensionality", although
T + r of country i is obtained by noting that lnyT =ln L
Y
T
lnA0 T () to a lesser extent than a purely nonparametric model where both z and
and subtracting initial income from both sides of x enter nonparametrically. Fan and Zhang (1999), suggest that the
lnyT + r = lny * + (1 )lnyT to arrive at: appeal of the model is that by allowing coefficients to depend on other
variables, the modeling bias can significantly be reduced, and the curse
Y Y a
ln ln = r + (lnA 0 + T ) + lnsik of dimensionality can be avoided.
L L 1 a
i, T + r i, T One can estimate δ(z) using a local least squares approach, where
a+
ln(ni + + )
( ) ( )
1
1 a (z ) = (nhq) 1 n
X XT K
Zj Z
(nhq ) 1 n
XyK
Zj Z
j=1 j j h j =1 j j h ,
f Y
+ lnsi ln =[Dn (z )] 1An (z )
1 a L i, T

Hence based on this literature we estimate the unrestricted version where K(.) is a kernel function and h is the smoothing parameter for
of this model as follows: sample size n. The intuition behind the above local least-squares esti-
N T mator is straightforward. Let us assume that z is a scalar and K(.) is a
yit = 0 + i Di + t Dt + k
3lnsit + 4 ln(n it + + )+ f
5lnsit
uniform kernel. In this case the expression for δ(z) becomes:
i=1 t=1
1
+ a6lnxit + (1)
it
(z ) = Xj XTj Xj yj
where yit refers to the growth rate of GDP per capita in each country and |zj z| h |zj z| h

for each period, Dt and Di are dummy variables for each period and for
the countries respectively, sitk is the share of output devoted to physical In this case δ(z) is simply a least squares estimator obtained by re-
capital accumulation, sitf is the output share of FDI capital stock, nit is gressing yj on Xj using the observations of (Xj, yj) that their corre-
the growth of population, is the rate of exogenous technological sponding zj is close to z |zj z| h . Since δ(z) is a smooth function of z,
| (z j ) (z )| is small when |zj z| is small. The condition that nhq is
change, is the depreciation rate for capital, x it is per capita initial
large ensures that we have sufficient observations within the interval
income.
|zj z| h when δ(zj) is close to δ(z). Therefore, under the conditions
The scope of our study is not to estimate the above equation para-
that h→0 and nhq →∞, one can show that the local least squares re-
metrically.4 Our goal is to estimate the effect of FDI under different
gression of yj on Xj provides a consistent estimate of δ(z). In general, it
regulatory regimes, so we apply non-parametric techniques to allow for
can be shown that
varying coefficients of FDI across countries and time under different
labour and credit market regulation schemes; since attraction of FDI
may depend on the regulatory policies within a country. nhq ( (z ) (z )) N (0, ),

where Ω can be consistently estimated. The estimate of Ω can be used to

3.2. Estimation method construct confidence bands for δ(z). We use a standard multivariate
kernel density estimator with Gaussian kernel and cross validation to
A semiparametric smooth coefficient model is considered to be a choose the bandwidth.
useful and flexible specification for studying a general regression re- For our estimation analysis we follow 4 different smooth coefficient
lationship with varying coefficients. It is a generalization of varying semiparametric models:
coefficient models and it is based on polynomial regression.5 In parti-
cular, varying coefficient models are linear in the regressors but their N T
k
coefficients are allowed to change smoothly with the value of other yit = 0 + i Di + t Dt + 3lnsit + 4 ln(n it + + )
i=1 t=1
variables. One way of estimating the coefficient functions is by using a f
local least squares method with a kernel weight function. + F (sit ) lnsitf + a5lnx it + it (2)

N T
4 k
In the growth literature, theories emphasize the existence of threshold ef- yit = 0 + i Di + t Dt + 3lnsit + 4 ln(n it + + )
fects (Azariadis & Drazen, 1990), the possibility of multiple regimes and i=1 t=1

parameter heterogeneity from human and ICT capital (Durlauf & Johnson, + f
F (sit , cit ) lnsitf + a5lnxit + it (3)
1995; Kalaitzidakis et al., 2001; Ketteni, Mamuneas, & Stengos, 2007; Liu &
Stengos, 1999; Mamuneas, Savvides, & Stengos, 2006; Masanjala & N T
Papageorgiou, 2004), and FDI capital (Ketteni et al., 2015; Kottaridi & Stengos, yit = 0 + i Di + t Dt + k
3lnsit + 4 ln(n it + + )
2010). i=1 t=1
5
For description of the method, please refer to Fan and Zhang (1999), Li et al. f
+ F (sit , l it ) lnsitf + a5lnx it + it (4)
(2002) and Mamuneas et al. (2006) among others.

418
E. Ketteni, C. Kottaridi
N T
yit = 0 + i Di + t Dt + 3lnsit
i=1 t=1
f
+ F (sit , cit, l it ) lnsitf + a5lnx it +
where all the variables are as stated before, cit captures credit and lit
labour regulations, respectively.
The first model (Eq. (2)) examines the effect of FDI alone on growth
while it varies based on the share of the FDI within a country. The next
two (Eqs. (3) and (4)) examine how the effect of FDI on growth is af-
fected under different credit and labour regulation regimes respec-
tively. Finally, the last model (Eq. (5)) examines how both regulation
regimes together affect the FDI-growth nexus.
The presence of a linear part makes this model more general than
the model of Fan and Zhang (1999) i.e. our models are of the form:
yit = it a + F (.) lnsitf + it
where = (Di , Dt , lnsitk , ln(nit +
it
tisfies E ( it = 0. f f
it , sit , cit , lit , lnsit ) data on greenfield FDI render it almost impossible to assess in a con-
Following Mamuneas et al. (2006), the coefficients of the linear part
are estimated in the first step using a polynomial fitting and an initial
small bandwidth. These estimates are then used to redefine the de-
pendent variable and return then to the simple smooth coefficient en-
vironment of Fan and Zhang (1999), Li et al., 2002, Mamuneas et al.
(2006) and Ketteni (2009):
yit* = F (.) lnsitf + *
it ,
where * denote the redefine dependent variable and error term. In es-
timating the F (.) , we use a standard multivariate kernel density esti-
mator with Gaussian kernel and cross validation to choose the band-
width. In the graphical analysis that follows, we have plotted the
estimated F (.) , along with their 95% confidence intervals. In cases
where these confidence bands include zero, this is a suggestion of an
insignificant effect.
In order to be consistent with previous research and to account for
endogeneity we have included the exogenous component of FDI in the
model. We use instrumental variables to compute the exogenous com-
ponent of FDI. The instruments used are lags of the explanatory vari-
ables and year dummies. In this paper, we have also used lagged values
of FDI instead of current values to see whether we obtain similar gra-
phical representations of the effect. This is a check of whether the
correlation between current FDI and growth is similar to that of past
FDI and growth which also addresses the endogeneity issue in growth
models.
3.3. Data sources
Our dataset includes 66 countries for the period between 2000 and
2015,6 35 of which are developing and 31 are developed countries.7
From the sample of developing countries, we have selected the high and
middle-income ones. We have excluded the low-income cases (only 3
countries) which were minor and could potentially cause outlier pro-
blems (see Appendix A for list of countries considered in the analysis).
The variables included in our dataset are: the share of FDI inflows as
% of GDP, GDP growth, GDP per capita at constant 2005 US $ and GDP
per capita growth, the share of private investment % of GDP, total
population and population growth as well as the regulation variables
(credit and labour). FDI data were obtained from the UNCTAD database
while the rest of the data comes from the World Development
6
This period was chosen based on the availability of annual data. Before 2000
the data were in 5-year intervals and if chosen to use in this form the sample
would have been smaller.
7
Selection of countries was based according to regulation data availability.
Criterion for splitting the countries is from the World Bank based on GDP per
capita.
International Business Review 28 (2019) 415–427
Indicators.
k
+ 4 ln(n it + + ) FDI is not necessarily new equity capital entering a market; this is
one (usually the largest part) component of FDI which has three com-
it (5) ponents8: equity capital, reinvested earnings and intra-company loans.
A second component regards reinvested earnings, i.e., the direct in-
vestor’s share (in proportion to direct equity participation) of earnings
not distributed as dividends by affiliates, or earnings not remitted to the
direct investor, but reinvested by affiliates. Finally, the last component
can be intra-company loans or intra-company debt transactions; these
are short- or long-term borrowing and lending of funds between direct
investors (parent enterprises) and affiliate enterprises. Additionally, FDI
should be discriminated between greenfield investments and M&A
(Georgopoulos & Preusse, 2009). Greenfield investments regard newly-
established subsidiaries while M&A refers to acquisition of at least 10%
of the equity of an existing firm operating in the host country. Un-
fortunately, the lack of accurate data regarding the two modes of FDI,
+ ), lnx it ) and the error term sa- does not permit us to use separate measures for greenfield vs. M&A FDI
for our exercise. In this regard, scholars state that the lack of reliable
vincing way whether M&As have the same effect on growth as green-
field FDI (Ashraf, Herzer, & Nunnenkamp, 2014). Usually, the few
studies which proceed to this distinction approximate greenfield FDI by
subtracting M&A sales from total FDI inflows. Moreover, the reporting
of M&As is not consistent with FDI statistics (Ashraf et al., 2014).9
Recently, UNCTA has developed a new database measuring greenfield
investments and M&A, however, there are issues there too.10 To avoid
statistical biases, we proceed with total FDI as registered in the balance
of payments which is commonly accepted and leave the distinction
between greenfield FDi and M&A for future work.
We define the initial per capita GDP to be the per capita income at
the beginning of each 5 year interval period following Kalaitzidakis
et al. (2001). Population data were used in order to obtain nit . We add a
constant of 0.1 to the population growth to capture the combined effect
of the depreciation rate and technological change, according to stan-
dard methodology.11 Following Mankiw et al. (1992) we assume that
and are constant across countries. reflects primarily the advance-
ment of knowledge, which is not country specific. And there is also no
strong reason to expect depreciation rates to vary greatly across coun-
tries. So, for the sake of simplicity we keep these two constants. Also
changing their values will not alter our results. In contrast, the A0 term
reflects not just technology but resource endowments, climate institu-
tions and so on; it may therefore differ across countries. Assume
lnA0 = a0 + , where a0 is a constant and is country specific shock.
Additionally, some of the variation with respect to the different coun-
tries is captured by the dummy variables included in the model.
The regulation data are in the form of indices. The regulation data
are obtained from the Economic Freedom of the World of the Fraser
8
UNCTAD, https://unctad.org/en/Pages/DIAE/FDI%20Statistics/Sources-
and-Definitions.aspx.
9
FDI is a balance-of-payments concept, i.e. FDI flows are recorded on a net
basis for a particular year. Transaction amounts recorded in M&A statistics are
for the time of the announcement or closure of particular deals, and the
amounts are not necessarily for a single year (UNCTAD, 2000).
10
In that database, the sum of greenfield FDI and M&As often exceeds net FDI
inflows as reported in the balance-of-payments statistics. UNCTAD’s M&A sta-
tistics are based on Thomson Reuters which may include transactions via do-
mestic and international capital markets which are normally not considered as
FDI flows. Greenfield FDI statistics are based on information provided by FDI
Markets of Financial Times. Again, this dataset may include investments that
normally would not be considered as FDI flows.
11
The depreciation rates found in datasets usually range between 0.02-0.05
for different countries, so including also the technological change a 0.1 for the
combined effect seems reasonable. Of course, changing 0.1 into any different
value will not alter the results.
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E. Ketteni, C. Kottaridi International Business Review 28 (2019) 415–427

Table 1
GMM estimation results- Developing countries (Arellano and Bond).
MODEL 1 MODEL 2 MODEL 3 MODEL 4

Coefficient p-value Coefficient p-value Coefficient p-value Coefficient p-value

ln initial income −1.236 0.216 −1.268 0.209 −1.097 0.284 −1.120 0.275
ln population growth −0.778 0.269 −0.733 0.303 −0.780 0.266 −0.712 0.316
ln investment share 7.347* 0.000 7.329* 0.000 7.279* 0.000 7.228* 0.000
ln fdi share 0.381 0.315 −0.288 0.855 1.783 0.428 1.420 0.641
lnfdi*labour −1.33 0.528 −1.671 0.527
lnfdi*credit 0.812 0.225 0.938 0.446
constant −11.39 0.213 −11.64 0.213 −11.650 0.212 −11.921 0.202
gdpgrowthLag1. 0.174*** 0.065 0.176*** 0.065 0.168*** 0.077 0.169*** 0.086
Sargan test 0.912 0.864 0.851 0.943
Serial Correlation+ 0.165 0.188 0.193 0.191

**
5% significance.
* 1% significance.
*** 10% significance.
+
Second order serial correlation.

Table 2
GMM estimation results- Developed countries (Arellano and Bond).
MODEL 1 MODEL 2 MODEL 3 MODEL 4

Coefficient p-value Coefficient p-value Coefficient p-value Coefficient p-value

ln initial income −19.311* 0.000 −17.966* 0.000 −18.677* 0.000 −17.857* 0.000
ln population growth −1.501* 0.001 −1.485* 0.003 −1.562* 0.002 −1.488* 0.002
ln investment share 13.905* 0.000 14.541* 0.000 13.991* 0.000 14.698* 0.000
ln fdi share 0.523** 0.051 1.725** 0.021 0.801 0.358 2.233** 0.044
lnfdi*labour −0.045 0.793 −0.068 0.589
lnfdi*credit −0.138*** 0.076 −0.142*** 0.062
Constant 145.58* 0.000 138.900* 0.000 147.101* 0.000 137.957* 0.000
gdpgrowthLag1. 0.135*** 0.071 0.122 0.115 0.132*** 0.096 0.125 0.133
Sargan test 0.920 0.823 0.971 0.898
Serial Correlation+ 0.499 0.711 0.269 0.673

* 1% significance.
** 5%significance.
*** 10% significance.
+
Second order serial correlation.

Institute (2015).12 The Fraser Institute data has been extensively used
in related literature to address the impact of various freedom indicators
on economic growth (De Haan & Sturm, 2000; Gwartney, 2009;
Justesen, 2008; Paldam, 2003), yet, very few works have focused on the
regulation aspect. We employ two main regulatory measures in which
we are mostly interested: labour regulation and credit market regula-
tion. Labour regulation evaluates the extent to which market forces are
allowed to determine wage and salaries and dictate the conditions of
hiring and firing. Credit provides indication on the extent to which the
banking system is privately owned, the extent to which credit is sup-
plied to the private sector and the extent to which controls on interest
rates interfere with the market of credit. The regulation variables are
rated in values out of 10. A higher rating is an indicator of a greater
degree of economic freedom.
4. Empirical results
4.1. Parametric results
The parametric estimates are presented in Tables 1 and 2 presented
at the end. Table 1 presents results for developing countries while
Table 2 for developed. To account for dynamic aspects we use dynamic
panel data techniques such as Difference Generalized Method of Mo-
ments (DIF-GMM) estimators attributed to Arellano and Bond (1991)
and System Generalized Method of Moments (SYS-GMM) estimators
proposed by Arellano and Bover (1995) and Blundell and Bond (1998)
respectively.13 The Sargan tests indicated that there is no evidence to
reject the validity of the instruments used, and the serial correlation
ones show no second order serial correlation for all models under in-
vestigation.
Looking at the results for both groups of countries, we can draw the
following conclusions: first, the coefficient estimates for initial GDP,
investment share and population growth are of the anticipated sign and
significant in all regressions for the developed countries, while in the
developing group, only the investment share turns out significant.
These results are robust to alternative specifications with FDI and
regulations. Second, the estimates of FDI are positive and significant for
the developed group but emerge as non-significant for developing
countries. When interacted with the labour market regulation index,
the effect of FDI is insignificant in both groups of countries, while when
interacted with the credit regulation index the effect of FDI along with
the interaction term are significant only for the developed group. In this
case the FDI effect is positive while the interaction is negative, implying

12
James Gwartney, Robert Lawson & Joshual Hall, Economic freedom dataset
13
published in Economic freedom of the World, 2013, Annual Report, Fraser For space economy the SYS-GMM are available upon request since they
Instutute, URL: http://www.freetheworld.com/datsets_efw.html yield similar results.

420
E. Ketteni, C. Kottaridi International Business Review 28 (2019) 415–427

that the higher the credit freedom, the less important is the FDI to
growth. Finally, when both interactions are included in the model we
see significant effects only for the developed group, same as in the
model with only credit regulations. The above results do not come as a
surprise given the majority of existing studies providing inconclusive
results. Hence, our call for non-parametric methods that could elabo-
rate the FDI-growth nexus under the prism of more or less stringent
credit and labour market regulatory regimes seems to be valid here.

4.2. Semiparametric linear results

When estimating the smooth coefficient semiparametric model we

obtain estimates of F (.) , the effect of FDI, along with estimates for the
coefficients of the linear part of the model. The coefficients appear to
have the appropriate signs and are significant.14 That is, we observe
that investment and population growth come out as expected, in-
dicating a positive and a negative significant effect on growth in all
specifications. Using F-tests we see that time and country dummies are
also jointly significant.
We have also tested the smooth coefficient semiparametric model
specification for the model that applies to the whole sample against a
more general nonparametric specification (under the alternative based
on Fan & Li, 1996). We fail to reject the null of the smooth coefficient
semiparametric model used in our analysis with a p-value of 0.31. The
model is also supported for the two groups of countries used in our
analysis, developed and developing with p-values 0.33 and 0.39 re-
spectively.

4.3. Graphical analysis – nonparametric components

Fig. 1. (A,B) FDI effect on growth.

This section presents the nonparametric results from the estimation

of the smooth coefficient semiparametric model. Semiparametric esti-
mation allows both regulation variables and FDI share to influence GDP
growth in a heterogeneous fashion, while it also allows for interactions
between the three variables. We present the results using the lagged
values of the FDI, which we believe are more appropriate to deal with
endogeneity issues, even though the results are similar with the current
FDI values. In order to obtain a graphical analysis for the smooth
semiparametric components when more than one variable is included
in the function, we need to evaluate the F (.) functions at the mean of
the number of variables minus one.
The purpose of this study is to evaluate the effect of FDI on growth
under different regulation regimes for both developed and developing
countries. So besides the means, in the last specification, we will use the
minimum values (indicating a high level of regulations) and the max-
imum values (suggesting regulatory freedom).15 These results will show
us whether the regulatory variables enhance the FDI growth impact. A
positive effect implies that greater FDI inflows in more flexible reg-
ulatory environments would increase growth.
Part A presents the results from model 1 (Eq. (2)), i.e., it provides
the effect of FDI on growth without regulations. Then in Part B we
present the effect of FDI under different credit regulation regimes (Eq.
(3)), followed by the effect under different labour regulation environ-
ments (Eq. (4)). Finally in Part C we present the effect under both
14
Literature has pointed out the initial income has a nonlinear effect on
growth; to take this into consideration we estimated the model using higher
powers of the variable. Our results regarding the effect of initial GDP per capita
coincide with previous research, indicating nonlinearities in very high – income
countries within each group gettingt the lowest growth rates. The results are
available upon request.
15
The labour regulation index ranges from 3 to 9.5 in both groups and the
credit regulation ranges from 7-10 for the developed group and from 4-10 for
the developing. For the developed group, the average for the credit index is 9
and for labour is 6, while for the developing group they are 8 and 6 respec-
tively. The FDI share ranges from 0 to 40% in both groups.
regulation schemes (Eq. (5)).
4.3.1. Part A: FDI effect on growth without regulations
Fig. 1(A) presents the FDI effect for developing countries while
Fig. 1(B) for developed. The vertical axis gives the effect of FDI on
growth while the horizontal is the share of FDI.
For both groups of countries we observe that FDI has a positive and
significant effect on growth. The effect though is not constant, it varies
and it appears to be increasing as the share of FDI within a country
increases. We identify however lower coefficients for the developed
group. On average the effect is 0.267 for the developing group and
0.182 for the developed. These results manifest that FDI is beneficial for
both developed and developing economies. We observe that this effect
becomes even stronger and highly increasing in the developing group
after a certain point. This might be due to higher spillover effects taking
place within these countries and potentially better coordination with
local rules and actors which enhance the growth effect. Coefficients are
smoother in the developed group. Obviously, these countries, due to
their better conditions, are better equipped to reap the benefits of FDI
along the spectrum of FDI shares. In addition, we may infer that MNEs
have already established ties with local economies and actors, and
given the stability of the economies, they do not need to proceed to
substantial changes in their strategies. Consequently, it appears a
smoother relationship between MNEs activities and growth.
4.3.2. Part B: FDI effect under individual regulation schemes
In this part we present the results from models 2 and 3 (Eqs. (3) and
(4)). First we present the results from model 2, which is the average
effect of FDI under different credit regulation regimes again for devel-
oping (Fig. 2(A)) and developed (Fig. 2(B)) countries respectively.16
16
The FDI effects under mean credit and labour regulations are similar to the
ones from model 1 and are skipped for space economy and are available upon
request.

421
E. Ketteni, C. Kottaridi
Fig. 2. (A,B) Mean FDI effect under different credit schemes.
The vertical axis presents the average effect of FDI and the horizontal
the regulation indices.
It is apparent from all graphs that the effect of FDI varies con-
siderably under different regulation regimes in both developed and
developing countries.
From Fig. 2(A) we observe that as developing countries become less
credit regulated the effect of FDI on growth shifts indicating a larger
effect in less credit regulated environments, yet, up to a certain
threshold. After a point (credit index = 8) the effect of FDI remains
stable for a while and then slightly decreases. Given that a value of 8
indicates a highly liberalized regime (in the scale of 10), this result
might imply that there might be a threshold, where after that we see
that further credit liberalization hampers or doesn’t alter the average
FDI effect on growth. This effect may imply that while MNEs may
benefit from credit liberalization adjusting their strategies and ex-
panding their activities domestically, after a certain threshold, more
liberalization stops being beneficiary to them because it might create
more complex financial conditions to them or because the rest of the
economy is not well equipped to support such a liberalization scheme
creating negative externalities.
A totally different picture is obtained in the developed group
(Fig. 2(B)). The effect of FDI on growth diminishes as the country moves
to credit regulation freedom. The effect, though it remains positive, it
gets smaller in more liberalized regimes, though not much smaller in
absolute terms. One may see from the graph that the effect remains
relatively stable (after index = 8). Further liberalization mainly doesn’t
change the FDI effect on growth. This result should be encountered
though within the lens of already highly liberalized markets. It suggests
that more financial freedom doesn’t necessarily enhance the FDI impact
on growth. High financial liberalization may create complexity which is
422
International Business Review 28 (2019) 415–427
Fig. 3. (A,B) Mean FDI effect under different labour schemes.
hard to supervise, thus, lead to fears of fragility and ultimately a fi-
nancial crisis as we witnessed recently. MNEs, given their wide scope of
activities and experience are aware of such fragility and, obviously,
adjust their strategies, collaborations and activities accordingly holding
a more “wait and see” position in the respective market, hence the
diminishing effect.
Turning now to the labour market impact (Fig. 3(A) and 3(B) ), it
emerges, similarly to Fig. 2(A), that the effect of FDI on growth is in-
creasing as the developing countries (Fig. 3(A)) move to a less labour
regulated environment. There is no change in this relationship com-
pared to the one in more credit liberalization regime. The less labour
regulation within a developing country, the higher will be the potential
effect from FDI on growth. It is obvious then, that more labour market
liberalization provides MNEs with flexibility in regards to their em-
ployees, hence expand their operations and create positive spillover
effects to the domestic economy.
For developed economies (Fig. 3(B)) we obtain a half U shaped ef-
fect of FDI on growth under varying labour regulation regimes. It
emerges that moving to less labour regulated environment the FDI ef-
fect slightly diminishes, reaches a minimum (index = 5) and starts in-
creasing thereafter. After this point, again as the country moves to la-
bour liberalization, the effect of FDI on growth is increasing. Less
labour regulated environments, after a threshold, enhances the FDI
effects on growth.
These results are consistent with Parcon (2008) who concluded that
FDI in developed and developing countries is affected differently by
different aspects of labour market regulations. Here we also observe
that the FDI effect on growth is affected by the labour regulatory regime
prevailing. Also, labour market reforms include a number of specific
actions, extending from firing and hiring regulations to hours
E. Ketteni, C. Kottaridi
Fig. 4. (A) FDI effect (mean labour) - different credit regulation schemes –
Developing countries. (B) FDI effect (mean credit) - different labour regulation
schemes – Developing countries.
regulation and collective bargaining. These may have different effects
on the MNEs’ activities. At the same time, initial liberalization (as
shown in the graph above) may not be adequate to spur MNE strategies.
After a threshold shown in the graph, MNEs may find that labour
conditions are such that enable them to manage their labour effectively
and efficiently.
4.3.3. Part C: FDI effect under both regulation regimes
Fig. 4(A) and (B) shows the FDI effect for developing countries
under different credit and labour regulation environments respectively,
while Fig. 5(A) and (B) presents results for the developed group.
The effect of FDI on growth for developing countries (Fig. 4(A) and
(B) is rather stable in low shares of FDI. After reaching a specific share,
the effect starts increasing for higher FDI inflows. Both Figures suggest
that the FDI effect on growth is higher in less regulated environments
with respect to both credit and labour markets. More labour and credit
flexibility stimulates the FDI effect on growth.
It seems that credit regulations have a larger impact on the FDI
effect on growth, when moving from a high to an average credit reg-
ulatory regime, than from an average to a liberalized one. Labour de-
regulation continues to enhance the FDI effect as we move to further
and further labour liberalization.
For developed economies (Fig. 5(A) and (B)), the effect of FDI on
growth is increasing as the share of FDI increases. Observing the dif-
ferent regulation schemes we notice that as the country becomes less
423
International Business Review 28 (2019) 415–427
Fig. 5. (A) FDI effect (mean labour) - different credit regulation schemes –
developed countries. (B) FDI effect (mean credit) - different labour regulation
schemes – developed countries.
regulated, in credit and labour respectively, the effect of FDI increases,
i.e. it shifts upwards. Again, the shift is bigger with respect to labour
regulations. Even a small change in credit regulation (moving from
minimum credit -high regulation- to mean credit) shifts the effect of FDI
by a lot, while moving to complete freedom does not alter the FDI ef-
fect. This is observed only in the credit regulation schemes. Under
different labour regulation schemes the effect moves upwards more
smoothly.
Generally, we observe that the effect of FDI shifts upward in less
regulated environments in the countries used in our analysis. Therefore,
regulations in a country affect the effect of FDI on the growth of the
specific economies by shaping MNE activities accordingly. It seems that
the effect of FDI is stimulated in less regulated environments, and
especially less labour regulatory regimes. This suggests that MNEs need
a specific degree of market freedom to expand their operations which in
turn spillover to the domestic market creating a virtuous cycle of lib-
eralization and MNE strategies. The credit deregulation affects the FDI –
growth nexus, but up to a point. Hence, MNEs are aware of the fragility
of financial markets after a certain threshold. Finally, comparing the
shifts in the FDI effect we conclude that deregulating has a larger effect
in the developing group of countries. This entails important policy
implications for these countries and suggests that liberalizing credit and
labour markets carefully (i.e. reassuring for audit and well-functioning
of markets) can lead to higher development through MNEs’ activities.
E. Ketteni, C. Kottaridi
5. Concluding remarks and policy implications
In this paper, we combine the institution-based approach in IB with
recent trends in economic literature discussing the role of regulations
on economic growth in order to provide new insights about channels
through which MNEs’ activities may spillover to host economies.
Taking as a starting point that institutions exist in distinct national
modes that generate a particular systemic logic of economic action and
competitive advantages (Jackson & Deeg, 2008), influencing the stra-
tegic development of firm-specific resources and the likelihood of suc-
cess of different corporate strategies (Wan, 2005), we shift our interest
to credit and labour market regulations and how these may generate
diverse effects on the economy through MNEs’ decisions and strategies.
As such, we contribute towards the need to connect the macro-essential
characteristics of a nation with the behavior of MNEs, i.e., provide a
specific link between macroeconomics and microeconomics (Stiglitz,
2018), and discuss a potential avenue of coevolution between firms and
their environment (Teegen, Doh, & Vachani, 2004).
Using a panel of developed and developing countries, we estimate
various specifications of a growth model using the smooth coefficient
semiparametric model, which allows the coefficients of the FDI variable
to vary as smooth functions of the share of FDI, credit and labour
regulations within the countries. In this regard, we move beyond ex-
isting regression analyses and statistics (Stiglitz, 2018) to identify more
complex relationships.
Generally, the results obtained in this study are: The FDI effect on
growth is positive and significant, in both developed and developing
countries. The effect is not constant and it appears to be increasing as
the share of FDI within the country increases. Secondly, the FDI effect
also varies according to the regulatory regime (credit or labour) in the
particular country. Labour regulations have a clearer effect of the FDI-
growth relationship. It is apparent that labour flexibility stimulates the
FDI effect on growth. Credit regulations have a more complex effect.
There appears to be a threshold in our results indicating that highly
complex financial environments that result from complete credit
freedom may hinder growth stemming from FDI. Finally, we observe
some differences in the effects between developed and developing
countries.
The results from this study pose a number of policy implications.
First, it turns out that an FDI policy design should be closely studied
within the wider conditions prevailing in a domestic market; the local
institutional context plays a significant role in how MNEs’ form their
strategies and our evidence suggests, that credit and labour market
regulations affect largely how FDI transmits to the recipient economy.
In this regard, it is not surprising that despite generous FDI policies fail
to bring in the desired outcomes. Second, it appears that the effect of
any policy on growth is most likely non-linear and heterogeneous;
consequently, policy makers should be aware of potential threshold
effects in order to be able to reap the maximum of benefits. In our
exercise, we identified such threshold effects (turning points), never-
theless, as these threshold points are not static; they are rather dynamic
as increasing globalisation involves conflicts between markets and
economic management leading to sophisticated decision making in
MNEs and more complex strategies (Buckley & Ghauri, 2004). Conse-
quently, a valid FDI policy design should be based on a careful analysis
of the institutional context as well as the evolving strategies of MNEs.
At the same time, institutional changes should also be considered in
424
International Business Review 28 (2019) 415–427
terms of their indirect effects in the economy, as for example via MNEs.
Third, labour market liberalization is highly relevant in enhancing the
growth effect of FDI; thus, any FDI policy intervention should be ac-
companied by labour market reforms. More financial liberalization
seems to also promote the FDI growth nexus but up to a point. Fourth,
the FDI effects are not uniform for the two groups of countries used in
our analysis; the latter indicates that different economies falling within
particular economic characteristics react differently to alternative
policy measures. This means that developing countries have now more
room relevant to developed ones, to boost their economies through FDI
and institutional reform.
Though this study focuses on the FDI effect on economic growth
under different regulatory regimes, we may pose a number of man-
agerial implications. Specifically, managers themselves need to be
aware of the impact of regulatory context when investing in a host
country as this alters their options and influences their cost functions. If
further financial and labour market liberalization takes place, multi-
nationals will need to re-evaluate their location strategies toward more
friendly-regulation host countries. Turning to countries with more lib-
eralized financial and labour markets when making the location choice
for foreign entry may be an important strategy that helps deal with
exogenous and endogenous uncertainty (Cuypers and Martin, 2010). At
the same time, as developing countries have more room to liberalize
than developed ones in both markets, our results indicate that they can
reap higher benefits from incoming FDI. Consequently, managers
should be alert of reforms taking place in developing nations which may
be more willing to move more aggressively towards liberalization in
their credit and labour markets. These reforms, accompanied with
better cost conditions, might give multinationals a significant ad-
vantage for location. The change in MNE investment behavior as a re-
sponse to engaging with host countries with more liberalized credit and
labour markets can be explained by the need to alleviate additional
transaction costs.
Lastly, limitations to this study may offer opportunities for further
research. We have focused our analysis on a standard growth model
including credit and labour market regulations. While this is necessary
to keep our analysis simple, future research might also control for ad-
ditional growth enhancing factors supported in related literature. In
addition, future research may open the floor to more specific regulatory
aspects of credit and labour markets, such as the private sector credit
and labour collective bargaining and how these interact with FDI and
spillover to the domestic economy. Moreover, our FDI is uniform, i.e.,
does not discriminate between greenfield investment and cross-border
M&As. Given the existing notion that the effects on growth between the
two might be quite different, we leave this question open for future
work.
Acknowledgements
The authors would like to thank three anonymous referees and the
participants of a competitive session at the 43rd EIBA Annual
Conference, in Milan, Italy for their insights and comments. We are also
indebted to the Editor of the International Business Review, Professor
Pervez Ghauri for efficient handling of our submission. The authors are
also indebted to the University of Piraeus Research Center, Piraeus,
Greece, for partial funding of this work. The usual disclaimers apply.
E. Ketteni, C. Kottaridi International Business Review 28 (2019) 415–427

Appendix A

See Table A1.

Table A1
Classification of Countries based on United Nations.
Developing Developed

Argentina Australia
Bolivia Austria
Brazil Belgium
Chile Bulgaria
China Canada
Hong Kong SAR Czech Republic
Colombia Denmark
Costa Rica Estonia
Dom. Republic Finland
Ecuador France
Egypt Germany
El Salvador Greece
Guatemala Hungary
Honduras Iceland
India Ireland
Indonesia Italy
Israel Japan
Jordan Latvia
Korea, South Netherlands
Malaysia Norway
Mauritius Poland
Mexico Portugal
Nicaragua Romania
Nigeria Slovakia
Paraguay Slovenia
Peru Spain
Philippines Sweden
Singapore Switzerland
South Africa UK
Sri Lanka United States
Thailand New Zealand
Turkey
Uruguay
Venezuela
Zimbabwe

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