Do stringent environmental and business regulations, and uncertainty matter for foreign direct investment inflows? Evidence from G7 and BRICS economies

This paper empirically evaluates the impact of environment stringency policy, business regulations, policy and economic uncertainty, and real GDP per capita on foreign direct investment (FDI) inflows by employing the autoregressive distributed lag approach and using data from 2000 to 2015. Specifically, we focus on two groups of countries with different economic development, the Group of Seven (G7) and the BRICS countries, and the composite indices of business and environmental regulations and policy-induced uncertainty, along with real gross domestic capital (GDP) per capita, were selected to reflect the multidimensionality of the settings in the selected countries. Our results indicate that only the effect of real GDP per capita turned out to be homogenous and statistically significant across different income groups and time horizons. Findings also show that more friendly business regulations significantly encourage FDI inflows in the long run, but there is a bottom line. When regulations are already at a low level, as is the case with G7 countries, further liberalization would adversely affect FDI inflows. Furthermore, more stringent environmental regulations have a marginally adverse effect on FDI inflows only in the long run. At the same time, they weakly support the pollution haven hypothesis. The impact of policy-induced uncertainty on investment is adverse but largely nonsignificant in the short run. It appears that cross-border investments follow a pattern of the safe-haven effect to avoid uncertainty in the long run.

Automated summary

This paper empirically evaluates the impact of environment stringency policy, business regulations, policy and economic uncertainty, and real GDP per capita on foreign direct investment (FDI) inflows. The results indicate that only the effect of real GDP per capita is homogeneous and statistically significant. Furthermore, more friendly business regulations encourage FDI inflows in the long run, but there is a bottom line. More stringent environmental regulations have a marginally adverse effect on FDI inflows in the long run and weakly support the pollution haven hypothesis.