How FDI inflows to emerging markets are influenced by country regulatory factors: An exploratory study

Abstract

Foreign Direct Investment (FDI) inflows to emerging nations exhibit a big variation. To what extent do host-country regulatory and institutional variables attract or repel FDI? We integrate various theoretical perspectives: transaction cost economics, global value chain analysis and liability of foreignness to examine the impact of formal regulations, rule-of-law, property rights, procedural bottlenecks and infrastructure on the attractiveness of an emerging market over a 12 year period. We seek to identify which of the many regulatory variables most influence the FDI decision. We find that countries with more efficient start-up regulations, stronger protection of minority investment, and better procedures and infrastructure for international trade across their borders attract more FDI. These results have important implications for government policy reform in emerging markets, as well as for multinationals selecting which nations to invest in.