Skip to main content

Foreign direct investment and the ease of doing business

Abstract

This paper examines the effect that a country’s business regulatory environment has on the amount of foreign direct investment it attracts. We use the World Bank’s Ease of Doing Business ranking to capture the costs that firms face when operating in a country. Several interesting results emerge. Firstly, the Doing Business rank is highly significant when included in a standard empirical foreign direct investment (FDI) model estimated on data averaged over the period 2004–2009. Secondly, the significance of the overall Doing Business is driven by the Ease of Trading Across Borders component. Thirdly, the relationship is significant for middle income countries, but not for the World’s poorest region, Sub-Saharan Africa, or for the OECD. Finally, we find no evidence that the ease of doing business of nearby countries has an effect on the FDI that a country gets in general.

This is a preview of subscription content, access via your institution.

Fig. 1

Notes

  1. 1.

    See http://www.doingbusiness.org/methodology/ for the full methodology.

  2. 2.

    From the Economics Report to the President: www.gpoaccess.gov/eop/.

  3. 3.

    See www.bea.gov.

  4. 4.

    The lack of significance of the tax component may seem surprising, especially given that it contains information on tax rates. However, Lawless (2009) shows that tax considerations have an effect on the decision to send FDI but not the level once a firm is in a country.

  5. 5.

    When we include the distance weighted Doing Business variables, market potential is no longer significant. This is true throughout and worth noting as perhaps these variables are capturing something that is closely related to market potential. Gillanders and Whelan (2010) presents results that the ease of doing business is a highly significant determinant of GDP per capita. If the ease of doing business is, on average, determining GDP then our surrounding Doing Business variables and market potential variable may be dampening each other’s estimated effect.

References

  1. Alesina, A., Ardagna, S., Nicoletti, G., & Schiantarelli, F. (2005). Regulation and investment. Journal of the European Economic Association, 3(4), 791–825.

    Article  Google Scholar 

  2. Asiedu, E. (2002). On the determinants of foreign direct investment to developing countries: Is Africa different? World Development, 30(1), 107–119.

    Article  Google Scholar 

  3. Asiedu, E. (2006). Foreign direct investment in Africa: The role of natural resources, market size, government policy, institutions and political instability. The World Economy, 29(1), 63–77.

    Article  Google Scholar 

  4. Barseghyan, L. (2008). Entry costs and cross-country differences in productivity and output. Journal of Economic Growth, 13(2), 145–167.

    Article  Google Scholar 

  5. Blonigen, B., Davies, R., Waddell, G., & Naughton, H. (2007). FDI in space: Spatial autoregressive relationships in foreign direct investment. European Economic Review, 51(5), 1303–1325.

    Article  Google Scholar 

  6. Blonigen, B. and J. Piger (2011). Determinants of Foreign Direct Investment. NBER Working Paper 16704, Cambridge, MA: National Bureau of Economic Research.

  7. Blonigen, B., & Wang, M. (2005). Inappropriate pooling of wealthy and poor countries in empirical FDI studies. In E. G. T. Moran & M. Blomström (Eds.), Does foreign direct investment promote development? (pp. 221–243). Washington, DC: Institute for International Economics.

    Google Scholar 

  8. Bruhn, M. (2011). License to sell: the effect of business registration reform on entrepreneurial activity in mexico. The Review of Economics and Statistics, 93(1), 382–386.

    Article  Google Scholar 

  9. Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy, 23(2), 397–415.

    Article  Google Scholar 

  10. Carr, D., Markusen, J., & Maskus, K. (2001). Estimating the knowledge-capital model of the multinational enterprise. The American Economic Review, 91(3), 693–708.

    Article  Google Scholar 

  11. Centre d’Etudes Prospectives et d’Informations Internationales. GeoDist and Gravity Databases. http://www.cepii.fr/CEPII/en/cepii/cepii.asp

  12. Djankov, S., Freund, C., & Pham, C. (2010). Trading on time. The Review of Economics and Statistics, 92(1), 166–173.

    Article  Google Scholar 

  13. Djankov, S., McLiesh, C., & Ramalho, R. (2006). Regulation and growth. Economics Letters, 92(3), 395–401.

    Article  Google Scholar 

  14. Eicher, T., L. Helfman, and A. Lenkoski (2011). Robust FDI determinants: Bayesian model averaging in the presence of selection bias. Working Papers 110.

  15. Gastanaga, V., Nugent, J., & Pashamova, B. (1998). Host country reforms and FDI inflows: How much difference do they make? World Development, 26(7), 1299–1314.

    Article  Google Scholar 

  16. Gillanders, R. and K. Whelan (2010). Open for business? Institutions, business environment and economic development. Working Papers 201040, School Of Economics, University College Dublin.

  17. Jayasuriya, D. (2011). Improvements in the world bank’s ease of doing business rankings: Do they translate into greater foreign direct investment inflows? Policy Research Working Paper 5787, Washington, DC: World Bank.

  18. Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82(3), 591–629.

    Article  Google Scholar 

  19. Lawless, M. (2009). Tax complexity and inward investment. Research Technical Papers 5/RT/09, Central Bank of Ireland.

  20. Lucas, R. (1993). On the determinants of direct foreign investment: Evidence from East and Southeast Asia. World Development, 21(3), 391–406.

    Article  Google Scholar 

  21. The Bureau of Economic Analysis. International Economic Accounts. http://www.bea.gov/international/index.htm

  22. The World Bank. Doing Business. http://www.doingbusiness.org/

  23. The World Bank. World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators

  24. The World Economic Forum. The Global Competitiveness Report. http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform/

  25. United Nations Educational, Scientific and Cultural Organization Institute for Statistics. Data Centre. http://www.uis.unesco.org/DataCentre/Pages/default.aspx

Download references

Acknowledgment

We are grateful to Michael Breen, Matt Cole, Ron Davies, Patrick Paul Walsh, Karl Whelan, an anonymous referee, the members of University College Dublin’s Trade Economics Group and attendees at the 2011 Irish Society for New Economists conference and the 2012 Irish Economic Association Conference for helpful comments and suggestions.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Adrian Corcoran.

About this article

Verify currency and authenticity via CrossMark

Cite this article

Corcoran, A., Gillanders, R. Foreign direct investment and the ease of doing business. Rev World Econ 151, 103–126 (2015). https://doi.org/10.1007/s10290-014-0194-5

Download citation

Keywords

  • Foreign direct investment
  • Business regulation
  • Trade costs
  • Regulation
  • Doing business

JEL Classification

  • F21
  • F23
  • O11