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.
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See http://www.doingbusiness.org/methodology/ for the full methodology.
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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.
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.
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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.
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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
- Foreign direct investment
- Business regulation
- Trade costs
- Doing business