The Effects of Restrictive Measures on Cross-Border Investment: Evidence from OECD and Emerging Countries

Amara Mohamed Isaac Zongo

doi:10.2139/ssrn.3854608

Abstract

This paper investigates the effects of global and sectoral restrictive measures on crossborder FDI among 49 advanced and emerging countries. We use a gravity model with panel data from 2010 to 2019 and the FDI Restrictiveness Index of the OECD that quantifies the level of restriction in FDI. Our results suggest that global restrictive measures do not significantly affect cross-border FDI in OECD countries, while restrictions in the service sector have negative and significant effects on FDI. Moreover, the overall restrictive measures and those in the service sector negatively impact inward FDI among OECD and big emerging countries. In addition, restrictions in the services sector impede inward FDI in African countries. Interestingly, restrictions in the secondary sector boost FDI between advanced and African countries, with larger effects for inward investments in African countries. The analysis of disaggregated sectoral restrictive measures shows that restrictions in business and other financial services are negatively associated with intra-OECD FDI, while restrictions in the banking sector have a significant positive impact on FDI. We also find that restrictions in the manufacturing sector have restrictive impacts on inwrad FDI in big emerging countries, and those in the mining, quarrying, and oil extraction sector hinder inward FDI in African countries. Reforms to liberalize sectoral restrictions by country have positive effects on FDI, but deregulation of the services sector has beneficial effects on inward FDI in all countries.

Highlights

Foreign direct investment (FDI) has become more and more important in economic growth and globalization in the last years
In order to determine whether the effects of foreign direct investment (FDI) restrictions can be expected to differ for developed and developing economies, we include a dummy variable equals 1 if the destination country is an OECD member in year t and an interaction term with the variable of interest capturing their level of FDI restrictiveness
We apply the PPML estimator to control for the zero FDI and heteroskedasticity issues, we include country fixed effects to control for structural multilateral resistance

Summary

Introduction

Foreign direct investment (FDI) has become more and more important in economic growth and globalization in the last years. Our paper provides a more recent analysis of the effects of restrictions on global FDI among advanced and emerging countries from 2010 to 2019 It considers the latest international guidelines for compiling foreign direct investment (FDI) statistics.[1] Second, Mistura and Roulet (2019); Gregori and Nardo (2021) study the effects of different types of restrictive measures on FDI. Contrary to Mistura and Roulet (2019), who analyze the effects of restrictions on FDI between OECD and non-OECD countries, we examine these effects at three levels: first, a study on FDI between advanced countries (intra-OECD), among OECD countries and emerging countries (BRICS and some Latin American and Asian countries), and between OECD countries and middle-income countries (North African countries and South Africa).[2] depending on type of economy, the impacts of sectoral measures are different. The last section uses the results of this study to perform policy simulation

Literature Review

Theoretical Gravity Model for FDI

Model and Estimation Issues

Data Description

FDI Gravity Results and Discussion

Conclusion