Working Paper: CEPR ID: DP5318
Authors: Giovanni Pica; Jos Vicente RodrÃguez Mora
Abstract: This paper presents evidence on the effect of countries proximity in regulation on bilateral FDI flows. By exploiting the OECD InternationalDirect Investment Statistics and data on nationwide regulation levels, we find a significant negative effect of the absolute value of the difference between countries indexes of regulation on the associated bilateral flows of FDIs, controlling for each country regulation level. Motivated by this evidence, we build a model where agents are heterogeneous and differ in their abilities to be entrepreneurs or workers. Entrepreneurs may engage in FDIs, which entails incurring additional fixed costs, one of which is the cost of learning the foreign regulation. In this framework, more similar regulations foster FDI, raise wages, output and productivity. The increase in productivity is the consequence of very efficient foreign entrepreneurs driving out of the market inefficient local firms, improving the allocation of talent in the economy as a whole.
Keywords: Heterogeneous agents; Multinational firms; Policy harmonization
JEL Codes: E61; F23; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| smaller differences in regulations between countries (L59) | larger bilateral FDI flows (F23) |
| absolute value of the difference in regulatory indexes (C43) | FDI flows (F21) |
| more similar regulations (L59) | reduce the learning costs for entrepreneurs (M13) |
| reduce the learning costs for entrepreneurs (M13) | increase the likelihood of engaging in FDI (F23) |