This article presents an analysis of the trends and patterns of foreign direct investment (FDI) in Mongolia, a former centrally planned economy which embarked on economic reforms in 1990. Since then, there has been a dramatic increase in FDI inflow into the country. The volume of FDI rose from less than one per cent of GDP in 1991 to 80 per cent by 2010. These foreign-owned enterprises have made a significant contribution to the country’s export earnings, but their effects on employment-creation and hence poverty-reduction remains very small. This appears to be largely due to a heavy concentration of foreign firms in relatively capital-intensive mining sectors rather than labour-intensive light manufacturing. Further, there is evidence to support growing business confidence that Mongolia has a potential of FDI to become a major player in global commodity markets with its rich gold, copper, zinc, uranium, coal, molybdenum and oil reserves.

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The aim of this paper is to provide a comprehensive assessment of the Trade Policy Review of Mongolia (TPRM) 2014. The TPRM 2014 demonstrates that the Mongolian economy is relatively open and it has very low formal trade barriers although there remain significant behind‐the‐borders barriers, including poor governance and infrastructure. Being a landlocked country, any major cross‐border‐price differences quickly results in informal trade with neighbouring China, limiting Mongolia's ability to pursue independent commercial policy. Mongolia's growth is not broad based and largely driven by the mining boom, making its economy highly vulnerable to external shocks. While this is not unique to Mongolia, and has been seen in many natural resource‐abundant countries, experience suggests that countries with sound institutions and macroeconomic policies have overcome the so‐called resource curse.

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This article presents an empirical analysis of the consequences of trade liberalization on import intensity in Mongolia, a ‘least-developed landlocked country’ with weak institutions and severe infrastructure bottlenecks. The theoretical framework employed in modelling is based on industrial organization and international trade literature. Our results suggest that foreign investment stimulates import intensity possibly due to the prevalence of intra-firm trade between subsidies, while the protection of domestic market and state ownership reduces import intensity. There is no statistically significant evidence to suggest that import intensity is lower in unskilled labour-intensive industries. These findings have significant policy implications for further liberalization in order to improve Mongolia’s trade competitiveness.