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Title: FDI, Allocation of Talents and Differences in Regulation

Author(s): Giovanni Pica and José Vicente Rodríguez Mora

Publication Date: October 2005

Keyword(s): heterogeneous agents, multinational firms and policy harmonization

Programme Area(s): International Macroeconomics, International Trade and Regional Economics and Public Economics

Abstract: This paper presents evidence on the effect of countries proximity in regulation on bilateral FDI flows. By exploiting the OECD International Direct Investment Statistics and data on nationwide regulation levels, we find a significant negative effect of the absolute value of the difference between countries indexes of regulation on the associated bilateral flows of FDIs, controlling for each country regulation level. Motivated by this evidence, we build a model where agents are heterogeneous and differ in their abilities to be entrepreneurs or workers. Entrepreneurs may engage in FDIs, which entails incurring additional fixed costs, one of which is the cost of learning the foreign regulation. In this framework, more similar regulations foster FDI, raise wages, output and productivity. The increase in productivity is the consequence of very efficient foreign entrepreneurs driving out of the market inefficient local firms, improving the allocation of talent in the economy as a whole.

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Bibliographic Reference

Pica, G and Rodríguez Mora, J. 2005. 'FDI, Allocation of Talents and Differences in Regulation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5318