OECD Economics Department Working Papers

ISSN: 
1815-1973 (online)
http://dx.doi.org/10.1787/18151973
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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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The negative effect of regulatory divergence on foreign direct investment You or your institution have access to this content

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Author(s):
Jean-Marc Fournier
19 Nov 2015
Bibliographic information
No.:
1268
Pages:
35
http://dx.doi.org/10.1787/5jrqgvg0dw27-en

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The determinants of foreign direct investment (FDI) are explored with gravity models, using a Poisson estimator and a linear estimator, both with fixed effects. The heterogeneity of product market regulations has a large and robust impact on cross-border investment: a reduction of regulatory divergence by one fifth could increase FDI by about 15%. In particular, the divergence of command and control regulations and of protection of incumbents (antitrust exemptions, entry barriers in networks and services) reduce cross-border investment. In addition, countries with higher employment protection have both less inward and less outward FDI, and there is some evidence that more complex regulatory procedures reduce inward FDI.
Keywords:
foreign direct investment, gravity model, heterogeneity, product market regulation, multinational firms
JEL Classification:
  • F15: International Economics / Trade / Economic Integration
  • F21: International Economics / International Factor Movements and International Business / International Investment ; Long-Term Capital Movements
  • F23: International Economics / International Factor Movements and International Business / Multinational Firms ; International Business
  • K20: Law and Economics / Regulation and Business Law / General
 
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