The Impact of Regulatory Divergence in NTM on the Cross-Border Investment of Multinationals

Andrzej Cieślik and Mahdi Ghodsi
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Mahdi Ghodsi: The Vienna Institute for International Economic Studies, Vienna University of Economics and Business

No DP-2023-21, Working Papers from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: In this paper, we study the effects of international regulatory convergence in non-tariff measures on the cross-border investment of multinational firms. We verify two main research hypotheses derived from the modified knowledge-capital model of the multinational enterprise. The first hypothesis postulates that when regulatory divergence with numerous regulatory measures in the destination emerges, trade cost also increases – stimulating horizontal multinational activity. The second hypothesis states that regulatory convergence could reduce the trade costs between the two trading partners, facilitating vertical multinational activity. To verify these hypotheses, we use firm-level data from the Orbis database for 2004–2020 and the Poisson pseudo-maximum likelihood (PPML) estimation technique. Our estimation results for the full sample of firms show that greater regulatory divergence is negatively associated with the extent of multinational activity. In addition, the convergence of technical barriers to trade seems more important than the convergence of sanitary and phytosanitary measures. Moreover, more productive firms can overcome problems associated with both technical barriers to trade and sanitary and phytosanitary distances. Finally, we find significant heterogeneity across sectors that varies according to technology intensity.

Keywords: : foreign direct investment; knowledge-capital model of multinational firms; non-tariff measures; regulatory divergence; technical barriers to trade; sanitary and phytosanitary measures (search for similar items in EconPapers)
Date: 2023-12-22
New Economics Papers: this item is included in nep-int
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