Does Doing Business matter for foreign direct investment?

Author: Doing Business
Publication: Doing Business 2013
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Many people who use Doing Business data—particularly in policy-making circles and in the private sector—associate better performance on the Doing Business indicators with greater inflows of foreign direct investment (FDI), even though the methodology is not explicitly designed for this purpose. Since the launch of last year’s report nearly 2,000 articles in the international press have drawn a connection between FDI and Doing Business. Such articles often suggest that higher Doing Business rankings will be associated with more foreign investment, which is believed to create jobs, bring in new technologies and processes and have other beneficial collateral effects on the real economy. And many senior government officials have suggested that a better ranking for an economy implies that its investment climate is more favorable to foreign investors.

Given the interest of so many governments in attracting more foreign investment, this raises an important question: does Doing Business actually matter for FDI? If so, does this suggest that Doing Business indicators reflect the quality of the investment climate at a broader level? This case study presents evidence suggesting that they do—supporting a broader claim that economies that provide a good regulatory environment for domestic firms tend to also provide a good one for foreign-owned firms.