This study aims to use a quantitative measure of trade policy space to investigate empirically whether trade policy space influences foreign direct investment (FDI) flows to countries.
The empirical analysis covers an unbalanced panel data set of 158 countries, over the period 1995–2015 and uses the two-step system generalized methods of moments approach.
The results suggest that the impact of trade policy space on FDI inflows is positive and increases as countries enjoy greater trade policy space. Furthermore, advanced economies tend to experience a higher positive impact of trade policy space on FDI inflows than less advanced economies.
These findings highlight the relevance of trade policy space for countries’ FDI inflows.
The analysis shows that non-trade related constraints to trade policy could reduce trade policy space and adversely influence FDI inflows, which are critical for countries’ economic growth and development.
To the best of the knowledge, this topic has not been addressed in the literature.
This article represents the personal opinions of individual staff members of the WTO and is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. The author would like to express his gratitude for the very helpful comments provided by anonymous Reviewers on an earlier version of this article. Any errors or omissions are the fault of the author.
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