What Drives FDI Policy Liberalization?: An Empirical Investigation

Centre for Applied Macroeconomic Analysis Working Paper No. 27/2012

36 Pages Posted: 5 Jun 2012

See all articles by Krishna Vadlamannati

Krishna Vadlamannati

University of Heidelberg

Arusha V. Cooray

Embassy of Sri Lanka, Oslo

Date Written: June 1, 2012

Abstract

Do countries compete for FDI by liberalizing their FDI policy regimes? Our measure of FDI policy liberalization is an event count of changes made by a country in a given year in the areas of approval procedures, sectoral restrictions, operational conditions, incentives, investment guarantees, foreign exchange, and corporate regulations to attract FDI. Using spatial econometric estimations on panel data for 148 countries during the 1992–2009 period, we find that favorable policy changes to the FDI regime in one country are positively correlated with FDI policy changes elsewhere (i.e., policy changes favorable to FDI from other countries, increase the likelihood of liberalizing FDI policy in the country in question). While low income countries compete among themselves for investment via the liberalization of FDI policy, competition is most fierce in those countries which are relatively more open to FDI. These results are robust to alternative weighting schemes, estimation methods, sample sizes, and controlling for the possibility of endogeneity.

Keywords: FDI policy liberalization, spatial econometrics

JEL Classification: C33, C26, F21

Suggested Citation

Vadlamannati, Krishna and Cooray, Arusha V., What Drives FDI Policy Liberalization?: An Empirical Investigation (June 1, 2012). Centre for Applied Macroeconomic Analysis Working Paper No. 27/2012. Available at SSRN: https://ssrn.com/abstract=2077254 or http://dx.doi.org/10.2139/ssrn.2077254

Krishna Vadlamannati

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Arusha V. Cooray (Contact Author)

Embassy of Sri Lanka, Oslo ( email )

Norway

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