What Drives FDI Policy Liberalization? An Empirical Investigation

Do countries compete for FDI by liberalizing policies favoring FDI? Our measure of policies favoring FDI is an event count of changes made by a country in a given year in the arena 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 attract FDI 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 policies favoring FDI in the country in question). While low income countries compete among themselves for investment via liberalization of policies favoring FDI, competition is most fierce in those countries which are already more open to FDI. These results are robust to alternative weighting schemes, estimation methods, sample sizes, and controlling for the possibility of endogeneity