Page 30 - Azerbaijan State University of Economics

Mahmoud M. Sabra: International Capital Inflows and Government Size: Evidence from
Panel Data in Selected Mena Countries

Furthermore, complex vertical FDI enhanced in case of; high income in region, or similarity between
countries, similarity in relative factor endowments, home and third countries are different in relative
factor endowments, countries are different in relative unskilled labor and when transport costs
between countries are high, Matsuura and Hayakawa (2008). This type produces overseas in the host
country to serve the domestic market more cheaply, or to save trade costs, and targets the host
country as an exports platform FDI to serve, in addition, other countries in the region through exports
or more FDI, which suggested by Ekholm et al. (2003). Knowledge Capital (KC) model stands if the
first two previous types were merged, which combines the main features of the vertical and horizontal
models.]; in particular, vertical, complex vertical and Knowledge Capital model (KC)
types. Trade liberalization and exposure of host country encourage MNEs to invest
internationally and produce overseas, as long as exporting intermediate goods from
headquarters, in home country, to affiliates, in host country, associated with low
barriers, and similarly, it applicable to final goods that re-exported to home country
or third country in the region. This, in fact, encourages MNEs decision of complex,
complex vertical and KC model types of FDI. Hence, positive relationship between
openness and FDI should be raised, in such cases. However, empirical investigations
would detect if such types dominant or not, in a particular economy or region. More
trade, employment, production reflects on government revenues and finance public
budget, which should influence the government size.

Country size and government size are associated negatively, where as population as
larger the cost of various non-rival (public) goods will be shared over more
economic units, and per capita costs of these public goods declining as taxpayers
increase, from one side, and the per capita required government expenditure will be
lower, from other side, that means smaller countries have relatively larger
governments, and vice versa ,Alesina and Spolaore, (1997), Alesina and Wacziarg,
(1998), Alesina (2003).

Furthermore, Wagner's law pointed out that urbanization may cause higher
government expenditure, which may refer to "the pressure of social progress" leads
to increasing government size, as long as government expenditure on investments in
education, health and infrastructure relatively highly in first stages of urbanization
and industrialization, Cameron, (1978).

On the other hand, country size and openness are negatively associated as long as
population, labor force and markets are large, which enjoy more labor division,
higher factor productivity that creates fewer incentives for openness in large markets
and economies comparing to small ones, Alesina et al. (2000).

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