Policy Liberalization and FDI Growth, 1982 to 2006

Over the last three decades the global economy has expanded in a remarkable fashion. While nominal world GDP has increased four times, world bilateral trade flows have grown more than six-fold, and the stock of foreign direct investment (FDI) has grown by roughly 20 times since 1980. The sources of global trade and investment growth are well known—general economic expansion, policy liberalization, and better communications and technology—but the impact of each source is unclear. In this paper we attempt to uncover the contribution of policy liberalization to the rising ratios of US inward and outward FDI stocks to GDP over the last three decades. The role of policy liberalization in fostering FDI expansion since the 1980s is murky. Policies related to FDI have undoubtedly been liberalized since the 1980s, but the changes are not easily quantified, making an assessment of their impact on FDI difficult. To get around this obstacle, we rely on stylized facts about US inward and outward FDI stocks and an unorthodox calculation method to approximate the role of policy liberalization on FDI growth.