FDI, international business and regulation

Abstract

PurposeMultinational corporations (MNCs) occupy a central role within the process of globalisation as evidenced through global foreign direct investment (FDI) inflows valued at US$3.1 trillion by the end of 2000. The importance of regulation is evident through the significant growth in global regulatory changes throughout the 1990s.The influence of regulation on UK firms' international investment decisions is assessed.Design/methodology/approachEconometric analysis measures the influence of regulation and political risk on 121 UK firms with international operations. Host countries are divided into developed and less developed regions based on the World Bank country classification. Data derive from questionnaires that cover the period 1994‐1996 and include information on host country features of two economically and culturally different countries in which firms have ongoing overseas operations.FindingsThe findings indicate that regulation is a statistically significant, and positive, factor influencing internationally mobile FDI. There are however, regional differences between less developed and developed economies. Proportionately smaller FDI inflows to less developed economies partially reflect MNCs' response to weak governance and the regional predisposition towards corrupt practices.Originality/valueHitherto international business has been able to avoid the regulatory reach as one of the perks of being an international player. The prospect for long‐term avoidance is of a more limited time‐frame as sovereign status does not exempt a country from international intervention. As countries adopt a united approach to regulation, avoidance becomes less of an issue and may be replaced by more critical evaluation of different types of regulation.