FDI Liberalization, 1973-2000

Sonal S. PandyaUniversity of Virginia

Why do countries liberalize FDI inflows?

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Overview

• Theory• Data Measurement• Results• Robustness Test• Broader Implications

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Motives for Liberalization: Usual Suspects

• Change in political representation democratization

• Ideology• Diffusion

competition; learning• External Constraints

IMF conditionality

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FDI: Key Stylized Facts

• FDI = cross-border movement of firm-specific assets

• FDI creates multinational firms that span across borders

• Multinational firms maintain internal capital markets

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Credit Constraints as Motive for FDI Liberalization

• Firms face a similar (though certainly not identical) credit market

• Credit constrained firm owners relatively more inclined to FDI liberalization as alternate source of capital

Consistent with observed “fire-sale FDI”(Krugman 2000, Aguiar and Gopinath 2005)

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Measurement: National FDI Restrictions

National FDI Restriction =% of unique ISIC Rev. 3 categories

subject to FDI entry restrictions

Based on original dataset of industry-level FDI entry barriers

Mean value for full sample = .3

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Economic Crises As Source of Credit Constraints

• 4 types of crises, binary Measures if occurred with past two years:Banking crises, Currency crises, Hyperinflation Recession

• Data from Abiad and Mody (2005)/Bordo et al (2001)• Crises unlikely to be endogenous to FDI liberalization

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Additional Features of Model

• Democracy (Polity)• Partisanship (DPI)• IMF conditionality (WDI)• Per capita GDP (WDI)Time-series cross-sectional data: 63 countries,

1973-2000OLS with panel-corrected standard errors and

country fixed effects

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Table 2: FDI Liberalization: Baseline Results(1) (2) (3)

Any Crisis -0.062(0.047)

Banking Crisis -0.107* -0.085(0.046) (0.062)

Currency Crisis -0.059 -0.040(0.040) (0.050)

Hyperinflation 0.044 0.049(0.079) (0.078)

Recession 0.076 0.076(0.054) (0.054)

Banking + Currency Crisis -0.051(0.080)

IMF Conditionality -0.072 -0.063 -0.066(0.080) (0.080) (0.080)

Polity Score 0.006 0.006 0.007(0.007) (0.007) (0.007)

Left 0.003 0.012 0.007(0.100) (0.106) (0.106)

Right -0.092 -0.096 -0.101(0.084) (0.089) (0.091)

Observations 359 359 359N Countries 47 47 47Standard errors in parentheses; * significant at 5%; ** significant at 1%Country fixed effects included in all models

Robust to Additional Tests

• Lags of democracy, IMF assistance (up to 5 years)

• Laeven and Valencia (2008) measures of banking, currency, and sovereign debt crises

• Interaction between crisis types and all political and regional variables

• Legal Origins (La Porta et al 1998)

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Summary &Broader Implications

• Credit-constrained firms are more likely to welcome FDI inflows as an alternate source of capital

• Economic liberalization obtains through change in underlying distributional effects

• Suggests a focus on micro-political economy is necessary

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Sample: 63 countriesArgentina Australia Austria BangladeshBelarus Belgium Bolivia BrazilCameroon Canada Chile ChinaColombia Costa Rica Denmark EcuadorEgypt El Salvador Ethiopia FinlandFrance Germany Ghana GreeceGuatemala Hong Kong India IndonesiaIsrael Italy Jamaica JapanKenya Korea Malaysia MexicoMorocco Mozambique Nepal NetherlandsNew Zealand Nigeria Norway PakistanPeru Philippines Portugal SenegalSingapore South Africa Spain Sri LankaSweden Tanzania Thailand TunisiaTurkey Uganda United Kingdom UruguayVenezuela Vietnam Zimbabwe

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Restrictions Measure Compares Favorably to Alternatives

• Political Risk Measures (PRS, Heritage Fdn)• IMF measure of FDI-related capital capital

controls• Coverage ratios• Gravity modelsMeasures based on observed restrictions most

theoretical sound and consistent with other measures of industry-level phenomena

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