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FDI, Allocation of Talents and Differences in Regulation

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This paper presents evidence on the effect of countries proximity in regulation on bilateral FDI flows. By exploiting the OECD International Direct Investment Statistics and data on nationwide regulation levels, we find a significant negative effect of the absolute value of the difference between countries indexes of regulation on the associated bilateral flows of FDIs, controlling for each country regulation level. Motivated by this evidence, we build a model where agents are heterogeneous and differ in their abilities to be entrepreneurs or workers. Entrepreneurs may engage in FDIs, which entails incurring additional fixed costs, one of which is the cost of learning the foreign regulation. In this framework, more similar regulations foster FDI, raise wages, output and productivity. The increase in productivity is the consequence of very efficient foreign entrepreneurs driving out of the market inefficient local firms, improving the allocation of talent in the economy as a whole.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 134.

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Date of creation: 01 Mar 2005
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Handle: RePEc:sef:csefwp:134

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Keywords: Multinational Firms; Heterogeneous Agents; Policy Harmonization;

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Cited by:
  1. Giovanni Pica & José V. Rodríguez Mora, 2007. "Who’s Afraid of a Globalized World? Foreign Direct Investments, Local Knowledge and Allocation of Talents," CSEF Working Papers 184, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 05 Oct 2009.
  2. Busse, Matthias & Groizard Cardosa, José Luis, 2006. "FDI, Regulations and Growth," Proceedings of the German Development Economics Conference, Berlin 2006 6, Verein für Socialpolitik, Research Committee Development Economics.
  3. Busse, Matthias & Groizard, Jose Luis, 2006. "Foreign direct investment, regulations, and growth," Policy Research Working Paper Series 3882, The World Bank.
  4. Valkonen, Laura, 2006. "Deregulation as a Means to Increase Competition and Productivity," Discussion Papers 1014, The Research Institute of the Finnish Economy.
  5. Marco Pagano & Giovanni Pica, 2011. "Finance and Employment," CSEF Working Papers 283, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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