[Séminaire Caen] The effect of public expenditure efficiency on foreign direct investment

Abstract:
This paper examines the effect of public expenditure efficiency on foreign direct investment (FDI) inflows using a panel of 100 developing countries over the period 1990-2017. We provide robust evidence that improvements in public expenditure efficiency significantly increase FDI inflows, with effects that are complementary to institutional quality, per capita income, and fiscal rules. Spending efficiency enhances FDI attractiveness through stronger domestic institutional quality, improved macroeconomic stability, and more favorable investment conditions. Crucially, our results indicate that it is not the level of public expenditure per se, but rather its efficient allocation and management, that drives foreign investment. Overall, the findings highlight that, beyond strengthening fiscal sustainability, efficient public resource management generates positive spillovers that reinforce the attractiveness of developing economies to foreign investors. This is particularly relevant in a context of increasing fiscal pressures and a persistent post-global financial crisis slowdown in FDI inflows to these economies.