Resource information
This paper revisits the institutional
determinants of foreign direct investment (FDI) using a
comprehensive new data set on the regulations that govern
FDI in more than 80 countries. It exploits the presence of
confirmed zero investment flows between countries to
estimate productivity cut-offs of firms that invest abroad
profitably. This approach corrects likely biases arising
from firm heterogeneity and country selection in a
theoretically derived gravity-type model. The analysis finds
inward FDI to be highly responsive to cross-country
variation in specific institutional provisions, such as
arbitration of disputes and legal procedures to establish
foreign subsidiaries. The importance of FDI-specific
provisions stands out even after controlling for the general
quality of institutions. Statutory openness to FDI, however,
has no association with actual inflow of investment. These
results are found to be robust to different specifications.
