Foreign Direct Investment and The Ease of Doing Business

This paper examines the effect that a country’s business regulatory environment has
on the amount of foreign direct investment it attracts. We use the World Bank’s Ease
of Doing Business ranking to capture the costs that firms face when operating in a
country. Several interesting results emerge. Firstly, the Doing Business rank is highly
significant when included in a standard empirical FDI model estimated on data averaged
over the period 2004-2009. Secondly, the significance of the overall Doing Business is
driven by the Ease of Trading Across Borders component. We argue that this is a more
intuitively appealing proxy for trade costs than the often used openness variable. The
relationship does not seem to exist for the World’s poorest region, Sub-Saharan Africa,
or for the OECD. Finally, we find no evidence that the ease of doing business of nearby
countries has an effect on the FDI that a country gets in general. However, in terms of
attracting FDI from the US, it helps to be near countries with good trade regulation
and bad regulation in other respects.