FDI Trapped in Red Tape

Recent figures by the OECD point once more to the importance of FDI in the globalized world of today. Countries put in place numerous incentive policies to attract FDI and benefit from multinational activity fostering the domestic development. Multiple studies were conducted using the gravity model to look at possible determinants and deterrents of FDI. The thrust of this paper is to explore the effect of bureaucratic and administrative impediments on the geographic distribution of US FDI and US foreign affiliate sales. We found that every 1% rise in bureaucratic impediments, has on average a negative effect of 0.477% on the geographic distribution of total volume of FDI flows and a negative effect of 0.814% on the level of sales of majority held US foreign affiliates. Based on our findings we recommend that governments should carefully monitor and improve the domestic public administration and in specific, concentrate on an investor friendly legal system.