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What Drives FDI Policy Liberalization? An Empirical Investigation

  • Krishna Chaitanya Vadlamannati


  • Arusha Cooray


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.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-27.

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Length: 36 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:een:camaaa:2012-27
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