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The Declining barriers to Foreign Direct Investments and how to see them

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Abstract

Although Foreign Direct Investments (FDI) are as important to the world economy as exports, the extensive literature on trade costs has no strong parallel for FDI. Data are hard to come by, and many of the barriers to FDI are unobservable. This paper circumvents the problem by inferring the barriers to FDI that are consistent with observed FDI data. I describe the distribution and evolution of these barriers to FDI between pairs of 28 OECD countries from 1985 to 2008. On average, barriers to FDI were halved every 4.8 years. Geography is a key determinant, but GDP per capita also plays a leading role. Decomposing the growth in FDI, I show that it has mainly been driven by lower bilateral barriers (75%), not by economic growth, and that bilateral FDI stocks will tend to crowd each other out, lowering their yearly growth by -3%.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2012/12015.pdf
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Bibliographic Info

Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 12015.

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Length: 28 pages
Date of creation: Feb 2012
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Handle: RePEc:mse:cesdoc:12015

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Keywords: Foreign direct investment; economic integration; gravity.;

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References

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  1. Crozet, M. & Mayer, T. & Micchielli, J.L., 2000. "How Do Firms Agglomerate? A Study of FDI in France?," Papiers d'Economie Mathématique et Applications 2000.50, Université Panthéon-Sorbonne (Paris 1).
  2. Jörn Kleinert & Farid Toubal, 2010. "Gravity for FDI," Review of International Economics, Wiley Blackwell, vol. 18(1), pages 1-13, 02.
  3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  4. Ariel T. Burstein & Alexander Monge-Naranjo, 2009. "Foreign Know-How, Firm Control, and the Income of Developing Countries-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 149-195, February.
  5. Dennis Novy, 2011. "Gravity Redux: Measuring International Trade Costs with Panel Data," CESifo Working Paper Series 3616, CESifo Group Munich.
  6. Sam Kortum & John Romalis & Brent Neiman & Jonathan Eaton, 2010. "Trade and the Global Recession," 2010 Meeting Papers 1340, Society for Economic Dynamics.
  7. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
  8. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  9. Mutti, John & Grubert, Harry, 2004. "Empirical asymmetries in foreign direct investment and taxation," Journal of International Economics, Elsevier, vol. 62(2), pages 337-358, March.
  10. Head, Keith & Ries, John, 2008. "FDI as an outcome of the market for corporate control: Theory and evidence," Journal of International Economics, Elsevier, vol. 74(1), pages 2-20, January.
  11. Andres Rodriguez-Clare & Natalia Ramondo, 2007. "Trade, Multinational Production, and the Gains from Openness," 2007 Meeting Papers 819, Society for Economic Dynamics.
  12. David S. Jacks & Christopher M. Meissner & Dennis Novy, 2008. "Trade Costs, 1870-2000," American Economic Review, American Economic Association, vol. 98(2), pages 529-34, May.
  13. Jacks, David S; Meissner, Christopher; Novy, Dennis, 2010. "Trade Booms, Trade Busts and Trade Costs," CAGE Online Working Paper Series 33, Competitive Advantage in the Global Economy (CAGE).
  14. Chen, Natalie & Novy, Dennis, 2011. "Gravity, trade integration, and heterogeneity across industries," Journal of International Economics, Elsevier, vol. 85(2), pages 206-221.
  15. Danny McGowan & Chris Milner, . "Trade Costs and Trade Composition," Discussion Papers 11/11, University of Nottingham, GEP.
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Cited by:
  1. Arita, Shawn & Tanaka, Kiyoyasu, 2012. "Heterogeneous multinational firms and productivity gains from falling FDI barriers," IDE Discussion Papers 324, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  2. Miroudot, Sebastien & Shepherd, Ben, 2012. "The paradox of “preferences”: regional trade agreements and trade costs in services," MPRA Paper 41090, University Library of Munich, Germany.

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