Impact of FDI Restrictions on Inward FDI in OECD Countries

Abstract

Attracting FDI has become an integral part of the national development strategies in many economies, as it is generally believed that the benefits from foreign direct investment (FDI) outweigh its drawbacks. The UNCTAD in its World Investment Report (2006) highlights that there were 205 FDI related policy changes across the world in 2005, and most of these changes made conditions more favourable for foreign companies to enter and operate. However, FDI is still far less liberalized than trade in goods and services. Recent studies undertaken at the OECD show that although declined significantly since 1980s, barriers to inward FDI are still widespread in OECD countries. This paper explores the impact of FDI restrictions on inward FDI stocks using panel time series ) data for 23 OECD countries. Our empirical results show that FDI restrictions do have significant impact on inward FDI stocks. The estimated short-run elasticity of inward FDI stocks with respect to FDI restrictions is in the range between -0.06 to -0.14, and the corresponding long-run elasticity is in the range between -0.64 to -1.49. This implies that by reducing barriers to FDI, countries such as Canada can significantly increase their level of inward FDI stocks.

Institutions and Foreign Direct Investment: Evidence from Sub-Saharan Africa Regions

“…In Asiedu (2006), for example, the effect of the three types of capital control policies on FDI inflows varies depending on the period and region. She is backed by Ghosh et al (2012) where the impact of FDI restrictions on inward FDI stocks in the 23 OECD countries is found to be positively significant with an estimated short-run elasticity that lies in the range between -0.06 to -0.14, whereas the corresponding long-run elasticity is in the range between -0.64 to -1.49 (see also Leitao, 2010). However, Butkiewicz and Yanikkaya (2008) argue that the trade-FDI linkage might be facilitated by institutions such as political stability and corruption in a host country.…”

The determinants of Foreign Direct Investment

“…One reason for this may possibly be the lack of variability of restrictions across subsets of OECD countries. Ghosh et al (2012) explore the impact of FDI restrictions on inward FDI stocks using panel time series data for 23 OECD countries. Based on the 2006 methodology of the Index update (Koyama and Golub, 2006), their estimate confirms the significant negative effect of restrictions on inward FDI stocks.…”

FDI and human capital

“…In general, evidence from developed countries appears to almost uniformly support the hypothesis that relatively high levels of human capital is considered a significant location advantage attracting foreign investors (Nicoletti et al, 2003;Agiomirgianakis et al, 2006;Ghosh et al, 2012;Serwicka et al, 2014;Dorozynska & Dorozynski, 2015). Most studies though, employ one or two measures of human capital, randomly.…”

“…In general, evidence from developed countries appears to almost uniformly support the hypothesis that relatively high levels of human capital is a significant location advantage attracting foreign investors (Nicoletti et al, 2003;Ghosh et al, 2012;Serwicka et al, 2014;Dorozynska & Dorozynski, 2015). Though education policy in CEE countries is crucial (Picciotto, 2003), few papers concentrate on the role of human capital as a determinant of foreign activities in the region, and when doing so, the results are ambiguous.…”

“…Based on the flow vs. stock measures of human capital discussed earlier, this study also employs stock measures; that is, we incorporate average years of total schooling (avgtotal) attained by the population aged 15 and above as well as average years of schooling in secondary (avgsectotal) and tertiary education (avgtertotal) 5 in order to capture the duration of formal schooling (e.g. Nunnenkamp & Spatz, 2002;Ghosh et al, 2012;Karimi et al, 2013). We also test for the proportion of total population with completed secondary and tertiary education (complsectotal and compltertotal respectively) (Noorbakhsh et al, 2001;Schatz, 2003;Li & Liu, 2005) in order to capture different durations of analogous school cycles.…”