Does policy reform promote FDI in developing economies? a firm-level simulation approach

Kiyoyasu Tanaka and Shawn Arita

Journal of Economic Policy Reform, 2016, vol. 19, issue 3, 281-304

Abstract: How do policy reforms for foreign investors in developing economies affect inward foreign direct investment? Using a firm heterogeneity model calibrated to match data on Japanese multinational firms, we simulate how multinationals respond to a decline in investment procedure days. We find that such policy reforms in investment procedures significantly increase the aggregate entries and sales of multinational firms in developing economies, with the more pronounced impact at the extensive margin than at the intensive margin. At the firm level, declining entry costs encourage more productive firms to invest in a wider range of markets although such impacts are modest for the most productive firms that already penetrate many markets. The impacts on foreign sales per multinational firm are less clear-cut in magnitude across productivity levels in part because falling entry costs directly increase multinational entry to developing economies, but only indirectly encourage their existing production in these markets.

Date: 2016
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DOI: 10.1080/17487870.2015.1100083

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