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The effect of competition policy on FDI location decision: an empirical investigation using data on inward FDI in 38 countries

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Abstract

The present paper investigates the effect of competition policy and market regulation on foreign direct investment's (FDI) location choice. The central research hypothesis considers the Product-Market Regulation (PMR) indicator as a determinant of FDI location decisions. The empirical analysis uses cross-sectional data on the stock of inward FDI in 38 countries and the Robust Weighted Least Squares (RWLS) estimation method, which the results show that the more the market regulation is anti-competition in the host country, the less the latter receives FDI. The implications of the results are highly relevant for the host country's policymakers because pro-competition policies are needed to attract inward foreign direct investment. In particular, Policymakers should liberalize investment and trade, lower tariffs and barriers to entry, limit the involvement of the State in the market regarding price control and other regulatory tools, and simplify the regulatory framework for foreign investors.

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Fig. 1

Source: OECD (2020), page 4

Fig. 2

Source: Author’s

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Notes

  1. Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Kazakhstan, Korea Republic, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, and United Kingdom.

  2. https://unctadstat.unctad.org/

  3. https://www.oecd-ilibrary.org/economics/data/oecd-product-market-regulation-statistics_pmr-data-en#:~:text=Product%20market%20regulation%20(PMR)%20indicators,market%20where%20competition%20is%20viable.

  4. https://wits.worldbank.org/

  5. https://data.worldbank.org/

  6. https://www.oecd.org/daf/inv/investmentstatisticsandanalysis/40193734.pdf

  7. We note that the sensitivity check tests are various, and the used type depends on each study. In this paper, we cannot conduct another sensitivity check using FDI flow instead of FDI stock. It is because we worked on cross-sectional data that cannot accept FDI flow due to its fluctuant nature, which could make the results unreliable. Secondly, we cannot use another estimation method to test the robustness of the model due to the normality issues related to small-sized samples, which RWLS resolves. And finally, we cannot use another proxy of market regulation or competition policy because there is no other composite indicator to compare. Thus, our only option is to change the model specification from logarithmic to linear endogenous variable to detect any change in the coefficients’ significance.

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Authors and Affiliations

  1. Faculty of Economics and Management, Laboratory of Economics and Management of Organizations (LEMO), Ibn Tofail University- Kenitra-Morocco, Kénitra, Morocco

    Jihad Ait Soussane & Zahra Mansouri

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  1. Jihad Ait Soussane
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  2. Zahra Mansouri
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Correspondence to Jihad Ait Soussane.

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Appendix

Appendix

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Table 8 Description and value range of the components of the PMR index.
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8.

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Ait Soussane, J., Mansouri, Z. The effect of competition policy on FDI location decision: an empirical investigation using data on inward FDI in 38 countries. J. Ind. Bus. Econ. 50, 243–263 (2023). https://doi.org/10.1007/s40812-022-00252-y

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