Fiscal Decentralization and the FDI–Growth Nexus

Abstract

This paper contributes to the recent literature on the FDI--growth nexus by investigating whether fiscal decentralization moderates the growth effects of foreign direct investment (FDI). Using a panel of 69 countries over 1996--2020 with fixed-effects and system-GMM estimations, we show that while FDI generally promotes economic growth, its positive effect is significantly attenuated in countries with higher levels of fiscal decentralization, on both the revenue and expenditure sides. We further identify infrastructure quality as a transmission channel through which expenditure decentralization dampens the FDI--growth nexus, suggesting a reduced capacity to finance national public goods in highly decentralized settings. These findings highlight the importance of intergovernmental coordination in preserving the growth effectiveness of foreign investment, and open new avenues for research on the institutional determinants of the FDI--growth nexus.