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How do country regulations and business environment impact foreign direct investment (FDI) inflows?

Farok J. Contractor, Ramesh Dangol, N. Nuruzzaman and S. Raghunath

International Business Review, 2020, vol. 29, issue 2

Abstract: How do multinationals choose which countries to invest in? This study addresses the essential question of the impact of regulatory variables in attracting or deterring foreign direct investment (FDI). We separate regulatory variables based on different stages of a firm’s life-cycle. Using World Bank data for 189 economies, we examine which host country regulatory factors influence inward FDI. We find that countries with stronger contract enforcement and more efficient international trade regulations attract more FDI. The interaction terms suggest that multinational companies are willing to trade-off a country's poorer institutional variable in return for another where the institutional variable is stronger. For example, multinationals are willing to invest in countries with less efficient entry and exit regulations in exchange for stronger contract enforcement. These results also have important implications for government policy reform.

Keywords: Selecting countries; Foreign direct investment (FDI); FDI regulations; Business environment; Ease of doing business; Entry and exit barriers; Government policy reform; Tradeoffs between institutional variables. (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ibusrev.2019.101640

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