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One-way effect or multiple-way causality: foreign direct investment, institutional quality and shadow economy?

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Abstract

This paper empirically investigates the three-way linkages amongst foreign direct investment (FDI), shadow economy and institutional quality by applying the panel dynamic simultaneous-equation modelling approach for a sample of 19 developing Asian countries over the period of 2002–2015. The empirical results by two-step System GMM show that institutional quality attracts inward FDI and FDI in its turn improves institutional quality, institutional quality is not only the cause but also the consequence of the shadow economy, and FDI inflows help reduce shadow economies though the channel of institutional improvement and lower shadow economies – which increase institutional quality – encourage FDI inflows. The empirical insights suggest helpful policy implications to deal with these dynamics simultaneously.

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  1. Becamex Business School, Eastern International University, 1 Nam Ky Khoi Nghia St, Thu Dau Mot City, Binh Duong, Vietnam

    Cong Minh Huynh

  2. University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam

    Cong Minh Huynh, Hoang Bao Nguyen & Phuc Canh Nguyen

  3. RMIT Vietnam, Ho Chi Minh City, Vietnam

    Vu Hong Thai Nguyen

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Huynh, C.M., Nguyen, V.H.T., Nguyen, H.B. et al. One-way effect or multiple-way causality: foreign direct investment, institutional quality and shadow economy?. Int Econ Econ Policy 17, 219–239 (2020). https://doi.org/10.1007/s10368-019-00454-1

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