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FDI, Allocation of Talents and Differences in Regulation

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  • Pica, Giovanni
  • Rodríguez Mora, José Vicente

Abstract

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.

Suggested Citation

  • Pica, Giovanni & Rodríguez Mora, José Vicente, 2005. "FDI, Allocation of Talents and Differences in Regulation," CEPR Discussion Papers 5318, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5318
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    Cited by:

    1. Anders C. Johansson & Dan Liu, 2020. "Foreign direct investment and inequality: Evidence from China's policy change," The World Economy, Wiley Blackwell, vol. 43(6), pages 1647-1664, June.
    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. Marco Pagano & Giovanni Pica, 2012. "Finance and employment [Credit constraints as a barrier to the entry and post-entry growth of firms]," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 5-55.
    4. Jonida MUSTAFARAJ, 2017. "The Importance of Clinical Psychologist in the Process of Divorce," European Journal of Multidisciplinary Studies Articles, European Center for Science Education and Research, vol. 2, EJMS Janu.
    5. Pica, Giovanni & Rodríguez Mora, José V., 2011. "Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents," Journal of International Economics, Elsevier, vol. 85(1), pages 86-101, September.
    6. Matthias Busse & José Luis Groizard, 2008. "Foreign Direct Investment, Regulations and Growth," The World Economy, Wiley Blackwell, vol. 31(7), pages 861-886, July.
    7. Valkonen, Laura, 2006. "Deregulation as a Means to Increase Competition and Productivity," Discussion Papers 1014, The Research Institute of the Finnish Economy.
    8. Cabral, René & García-Díaz, Rocío & Mollick, André Varella, 2016. "Does globalization affect top income inequality?," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 916-940.
    9. Onur Özdemir, 2020. "The handicap for enhanced solidarity across advanced economies: The greater the economic openness higher the unequal distribution of income," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 91(4), pages 585-632, December.

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    More about this item

    Keywords

    heterogeneous agents; multinational firms; policy harmonization;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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