The determinants of liberalization of FDI policy in developing countries: a cross-sectional analysis, 1992-2001

The decade of the 1990s are characterized by widespread liberalization of laws and regulations affecting inflows of foreign direct investment in developing countries. Using a database supplied by UNCTAD, this article employes a cross-sectional regression methodology to analyze the determinants of liberalization of foreign direct investment polices in 116 developing countries from 1992-2001. Ninety-five per cent of the changes in policies over the decade (1,029 of 1,086 were liberalizing rather than restrictive. Two possible explanations of liberalization are suggested: policy makers' beliefs that attracting more foreign direct investment is in the best interest of their countries, and external pressure to adopt neoliberal economic policies either fro the dominant power (the United States) or international organizations such as the World Bank or International Monetary Fund. Results provide strong support for the rational decision (or "opportunity cost of closure" argument and only limited support for the external pressure thesis. Country size, level of human resource capabilities and one trade is found to be the primary determination of the preposition to liberalize. [PUBLICATION ABSTRACT]