Investing across Borders with Heterogeneous Firms: Do FDI-Specific Regulations Matter?

Abstract

Using a new dataset, Investing Across Borders 2010, on selected regulations that govern foreign direct investment (FDI) in 87 countries, and direct investment they receive from 30 OECD source countries, this paper explores how much FDI-specic policies and institutions inuence FDI inows when rms are heterogeneous in terms of productivity. The analysis overhauls conventional estimation techniques by directly addressing biases resulting from country and rm selection. The paper nds evidence of substantial heterogeneity bias in the eects of distance and related policy barriers on the inow of FDI. Controlling for rm heterogeneity and country selection, as well as key determinants of FDI like market size, a statistically signicant relationship is found between FDI regulations and the value of inward direct investment. However, when the quality of logistics infrastructure is accounted for, the salience of FDI regulations diminishes. For a clear source of identication when correcting for selection biases, the paper uses another new indicator of the number of days and procedures required to establish a wholly foreign-owned subsidiary.

Starting a Foreign Investment across Sectors

“…However, our analysis and past research shows that there is no correlation between the size of the economy (measured by GDP) and the degree of openness as measured by the Investing Across Sectors indicators. There is a modest positive correlation between GDP per capital and sectoral openness, suggesting that higher-income economies tend to be more open to foreign investment across sectors, although this correlation is not statistically significant (Waglé, 2011). Many economies are in the process of letting go of restrictions in some sectors.…”

ECOWAS and AfCFTA: Potential Short-Run Impact of a Draft ECOWAS Tariff Offer

“…Moreover, Waglé (2011) indicated that liberalisation generally pays for itself over time, because distorted economies can allocate resources effectively and efficiently in the long run, which contributes to economic growth by widening the tax base. Nevertheless, it is still important for African countries to note that the AfCFTA is not a magic formula that will instantaneously solve the socioeconomic challenges of the continent.…”

Productivity Growth in Europe

“…10 We expand on these results by including eleven more European countries, controlling for more country-and firm-level factors, and employing a resampling technique to ensure that the sample accurately reflects the population. Wagle (2010) investigates the effects of regulation on FDI and concludes that FDI-increasing regulations prompt beneficiary firms to grow more quickly, through either selection effects or knowledge transfers. 11 We test for these effects using business environment variables.…”

“…Theory and experience indicate that openness to foreign investment helped these economies generate employment, upgrade technology, and improve managerial knowledge to accelerate productivity growth. In this regard, business regulations play an important role in attracting FDI, even after controlling for market size and factor endowments (Wagle, 2010;Demekas et al, 2007).…”