Trade policy space and foreign direct investment inflows

Abstract

Purpose This study aims to use a quantitative measure of trade policy space to investigate empirically whether trade policy space influences foreign direct investment (FDI) flows to countries. Design/methodology/approach The empirical analysis covers an unbalanced panel data set of 158 countries, over the period 1995–2015 and uses the two-step system generalized methods of moments approach. Findings The results suggest that the impact of trade policy space on FDI inflows is positive and increases as countries enjoy greater trade policy space. Furthermore, advanced economies tend to experience a higher positive impact of trade policy space on FDI inflows than less advanced economies. Research limitations/implications These findings highlight the relevance of trade policy space for countries’ FDI inflows. Practical implications The analysis shows that non-trade related constraints to trade policy could reduce trade policy space and adversely influence FDI inflows, which are critical for countries’ economic growth and development. Originality/value To the best of the knowledge, this topic has not been addressed in the literature.