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Foreign Direct Investment and Shadow Economy: A Causality Analysis Using Panel Data

By Hesam Nikopour, Muzafar Shah Habibullah, Friedrich Schneider and Siong Hook Law


The present paper investigates the link between the shadow economy and FDI using the Granger panel causality test. For that purpose we use the shadow economy and FDI data for 145 countries of five data points 1999/2000, 2001/2002, 2002/2003, 2003/2004 and 2004/2005. The system GMM estimation results show that FDI causes the shadow economy and vice versa. The empirical evidence supports the hypotheses that higher FDI causes lower shadow economy and higher shadow economy causes higher FDI.

Topics: O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements, F21 - International Investment; Long-Term Capital Movements, C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
Year: 2009
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