The impact of restrictions on FDI

Abstract

In the 1990s and 2000s, most countries – including many emerging economies – lifted some barriers to FDI together with trade liberalization; this trend has slowed since the global financial crisis. In this paper, we assess the impact of FDI restrictions on gross inflows by exploiting the sectoral dimension of FDI flows and of the Regulatory Restrictiveness Index (RRI) reported in the OECD databases. In a sample of 17 OECD countries and 23 sectors covering the years 2012-2018, we find that FDI restrictions significantly dampen foreign investments in the manufacturing and service sectors, particularly when they limit foreign equity acquisitions. We also take into account restrictions motivated by national security considerations, which are not scored in the RRI; similarly to other restrictions involving screening schemes, they have not had a significant impact on the size of FDI flows so far.