Does FDI Regulatory Policies Influence FDI Inflows in Developing Countries? A Non Linear Analysis

Abstract

Purpose: Foreign Direct Investment (FDI) inflow is regarded as highly important particularly for developing countries as it enhances economic activities and creates job opportunities. The main objective of the present study is to analyze the impact of two regulatory policies i.e. Regulatory Restrictiveness Index (RRI) and Ease of Doing Business (EDB) on FDI inflows in developing countries.

Research Gap: Not many studies have discussed the role of more than one regulatory policy to examine their impact on FDI inflows. Therefore, the present study is an attempt to bridge this research gap as it uses two regulatory policies to examine this relationship.

Design/Methodology/Approach: The study performs the non-linear analysis using two separate models to determine FDI inflows in 39 developing countries for the period 1997-2020.For this purpose FGLS econometric technique is utilized.

The Main Findings: The linearized marginal effects of RRI show that all the countries are located on the left side of U shaped curve while linearized marginal effects of EDB show that some countries lie on the left side and others lie on the right side of U shaped curve. The higher value of the level coefficient than the value of the quadratic coefficient reveals the stronger influence of level coefficients in both models.

Theoretical/Practical Implications of the Findings: The study concludes that developing countries need to reduce FDI restrictions to attract maximum FDI inflows. Furthermore, it is recommended that for improving the confidence of foreign investors, appropriate and consistent policies should be designed and implemented.