FDI and Investment Barriers in Developing Economies

Discussion Papers


by Shawn ARITA and Kiyoyasu TANAKA

November 2013


Does investment liberalization in developing economies affect FDI decisions differently across individual firms? To address this question, we simulate the response of individual firms to reductions in investment costs across developing economies. We explore two policy experiments: elimination of setup-procedure requirements for foreign investors and a reduction in corporate tax rates on foreign-owned multinationals. We find that a relaxing of discriminatory foreign investment procedures induces middle productive firms to increase their entry and production in developing economies substantially, but the most productive firms to expand moderately. Multinationals expand their entry and production in developing economies more substantially following a decline in entry barriers than following a decrease in corporate tax rates.

Keywords: FDI, firm heterogeneity, investment liberalization, developing country
JEL classification: C68, F21, F23, O2

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