Archived — Research Summaries: Working Paper 2008-01: Impact of FDI Restrictions on Inward FDI in OECD Countries

by Madanmohan Ghosh, Panagiotis Syntetos and Weimin Wang

Attracting foreign direct investment (FDI) has become an integral part of the national development strategies in many economies, as it is generally believed that the benefits from foreign direct investment (FDI) outweigh its drawbacks. The United Nations Conference on Trade and Development (UNCTAD) in its World Investment Report (2006) highlights that there were 205 FDI related policy changes across the world in 2005, and most of these changes made conditions more favourable for foreign companies to enter and operate. However, FDI is still far less liberalized than international goods. Recent studies undertaken at the Organisation for Economic Co-operation and Development (OECD) show that although FDI barriers declined significantly since 1980s, barriers to inward FDI are still widespread in OECD countries. Canada is one of the OECD countries with the highest restrictions on inward FDI.

This paper explores the impact of FDI restrictions on inward FDI stocks using panel time series (1981–2004) data for 23 OECD countries. Our empirical results show that FDI restrictions do have significant impact on inward FDI stocks. The estimated short-run elasticity of inward FDI stocks with respect to FDI restrictions is in the range between –0.06 to –0.14, and the corresponding long-run elasticity is in the range between –0.64 to –1.49. This implies that by reducing barriers to FDI, countries such as Canada can significantly increase their level of inward FDI stocks.

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