The Declining Barriers to Foreign Direct Investments and How to See Them

Although Foreign Direct Investments (FDI) are as important to the world economy as exports, the extensive literature on trade costs has no strong parallel for FDI. Data are hard to come by, and many of the barriers to FDI are unobservable. This paper circumvents the problem by inferring the barriers to FDI that are consistent with observed FDI data. I describe the distribution and evolution of these barriers to FDI between pairs of 28 OECD countries from 1985 to 2008. On average, barriers to FDI were halved every 4.8 years. Geography is a key determinant, but GDP per capita also plays a leading role. Decomposing the growth in FDI, I show that it has mainly been driven by lower bilateral barriers (75%), not by economic growth, and that bilateral FDI stocks will tend to crowd each other out, lowering their yearly growth by -3%.