Open Borders for Business?

While an extensive literature examines the regulation of entry by domestic firms, the causes and consequences of the regulation of entry by foreign firms have not been previously considered. First, we analyze the roles of culture, legal origin, democracy, and geographic openness as determinants of regulation of foreign entry. Strong evidence illustrates that more individualist cultures and geographically open countries regulate foreign entry less. Our findings also show that cultural values matter more in countries with common law traditions. In contrast, the association between democracy and the regulation of foreign entry is fragile. Next, we examine the consequences from foreign entry regulation. Evidence suggests a strong, negative, and economically significant association between the regulation of foreign entry and inward foreign direct investment (FDI). The regulation of domestic entry, however, is positively associated with FDI inflows. This result is robust to controlling for a variety of economic, cultural, and institutional variables.