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Service Trade Restrictiveness and Foreign Direct Investment - Evidence from Greenfield FDI in Business Services

Andre Jungmittag and Robert Marschinski

No JRC122116, JRC Research Reports from Joint Research Centre (Seville site)

Abstract: We study the impact of service trade restrictions on bilateral greenfield FDI projects in four different business services sectors within a gravity model framework. Project level FDI data for 42 destination countries and up to 41 source countries spanning the years 2014 to 2018 is taken from the fDi Markets database, and restrictions from the OECD’s Service Trade Restrictiveness Index (STRI). Using a negative binomial estimator to explain the number of bilateral FDI projects, we find that service trade restrictions represent a significant barrier for greenfield FDI. In 3 out of 4 business services, we obtain statistically significant evidence of a negative impact. Furthermore, the explanatory power of the models generally improves when using the sub-components of the STRI (restrictions to foreign entry, restrictions to the movement of people and other service trade restrictions), instead of the single aggregated index value. Based on the estimated impacts of the different restrictions, we carry out a series of simple simulations of how the number of expected FDI projects would increase in response to a hypothetical policy reform, and propose some sector-specific policy recommendations.

Keywords: Economic integration; service trade; foreign direct investment; business services; service trade restrictions; count data model; gravity model; greenfield investment; professional services; regulatory restrictions; investment restrictions (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020-10
New Economics Papers: this item is included in nep-int and nep-ppm
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Handle: RePEc:ipt:iptwpa:jrc122116