The effect of FDI regulatory barriers: evidence from OECD countries

Abstract

ABSTRACT This study aims to analyse the impact of the OECD FDI Regulatory Restrictiveness Index on actual FDI (Foreign Direct Investment) flows into the 38 OECD member countries. Using PPML (Poisson Pseudo Maximum Likelihood), GLS (Generalized Least Squares method), and Heckman’s sample selection estimator, this paper undertakes to identify the impact of FDI Regulatory Restrictiveness Index on FDI inflows to all OECD member countries from 129 partner countries from 2006 to 2021. It finds that the overall level of restrictions, screening and approval measures, and other operational restrictions all have a statistically significant negative sign, except for equity restrictions (ER). This suggests that the higher the level of restrictions on FDI, the less direct investment flows into OECD countries. In other words, liberalizing or reforming FDI restrictions can lead to an increase in inward FDI. Moreover, results show that the impact of even small regulatory relaxations is not negligible. While previous studies have mainly analysed the determinants of FDI inflows based on theories from the investor (supplier) perspective, this study differs in that it provides a reference analysis of FDI policies and laws from the host country’s (demander) perspective, in which areas and to what extent they need to be liberalized.