On the detrimental impact of visa restrictions on bilateral trade and foreign direct investment

This article estimates the effect of visa restrictions on bilateral trade flows and foreign direct investment (FDI) stocks. By raising the costs of travel and deterring some visitors, visa restrictions hamper personal contact across borders, which is detrimental to trade and FDI. Employing a standard gravity-type model in a global dyadic country sample, I estimate that if one country unilaterally requires a visa from nationals of the other country with no reciprocal restriction in place by the partner country, this lowers bilateral trade and FDI by up to 19 and 25 per cent, respectively. If both countries require a visa from nationals of the other country, the effect on trade is larger, but less than double, at up to 28 per cent, while the effect on FDI is essentially the same as for unilateral restrictions. With such substantial negative effects, it is at least questionable whether many of the existing visa restrictions would pass a cost-benefit test.