The Impact of Restrictive Measures on Bilateral FDI in OECD Countries

In 2016, some 55 economies introduced at least 112 measures affecting foreign investment. Two thirds of these measures sought to liberalise, promote and facilitate new investment (falling since 2016). Almost a third of these measures are new restrictions (increasing since 2016). Restrictive policies are growing in trade policy choices. This paper investigates the effects of restrictions on FDI stocks among OECD countries. Using a gravity model with panel data from 2010 to 2017 for all OECD countries, we suggest negative effects of restrictions on FDI stocks. Services sector deregulation and strict environmental restrictions have positive effects on FDI. Therefore, the difference in FDI restrictions between countries emerges as the key factor for foreign investment. This study also shows the substitution between foreign and domestic investment in the presence of FDI restrictions. The optimal policy to be implemented to attract FDI is to liberalise or deregulate the services sector specifically the financial sector.