Heterogeneous effects of nontariff measures on cross‐border investments: Bilateral firm‐level analysis

Abstract

We analyze the heterogeneous effects of technical regulations and safety standards embodied in nontariff measures on foreign direct investment using global firm‐level panel data of bilateral cross‐border ownership relationships over the period 2008–2018. We develop a novel measure of time‐varying bilateral ad valorem equivalents of sectoral nontariff measures, which reveals that technical barriers to trade (TBTs) played a much greater role as a trade‐inhibiting factor in comparison with import tariffs and sanitary and phytosanitary (SPS) measures over the period 1996–2018. Estimations using the Poisson pseudo‐maximum likelihood framework reveal the importance of nontariff measures as a driver of foreign direct investment.

Can multinationals withstand growing trade barriers?

“…This behaviour supports the 'tariff-jumping' motive behind setting up subsidiaries. We also see that the greater effect on affiliates of MNEs stems from non-tariff barriers, in line with the growing economic importance of these measures (Adarov and Ghodsi, 2023;Ghodsi and Stehrer, 2022;Ferrantino, 2016;Laget et al, 2021).…”

“…Import demand elasticities indicate how much (in percentage terms) the import volume changes when the import price changes by 1%. The bilateral import demand elasticities are taken from Adarov and Ghodsi (2023), which are estimated for the period 1996-2018. Second, we need to quantify the impact of regulatory NTMs on the volume of trade in goods at the 6digit level.…”

“…The reason for the rather limited investigation of TBTs and SPSs is that they are rather opaque measures that are more challenging to quantify, for reasons that will be clarified later. The effects of TBTs and SPS measures on FDI have only recently been investigated (Adarov and Ghodsi, 2023;Ghodsi, 2020a). Ghodsi and Stehrer (2016) investigate how regulations embodied in TBTs and SPSs affect GVCs.…”

“…Non-EU FDI to the CESEE region increases with rising TBTs, signalling that market efficiency attained through higher TBTs also encourages FDI from more distant locations. Adarov and Ghodsi (2023) go a step further empirically by analysing the effects of SPS measures on FDI too. The results reveal that SPS measures have no significant effect on FDI, while the effects of TBTs largely depend on whether they are levied by the home or the host economy.…”

Regulatory convergence within technical barriers to trade

“…The impact of regulatory NTMs on trade is very heterogeneous across countries, sectors and years. In fact, ad‐valorem equivalents of NTMs estimated by several papers in the literature are good evidence of such heterogeneity (Adarov & Ghodsi, 2021; Beghin et al, 2015; Bratt, 2017; Ghodsi et al, 2017; Kee et al, 2009; Niu et al, 2018). Moreover, various trading partners may be differently affected by NTMs.…”