factors as finance (access and cost), infrastructure (cost, availability, and reliability), labor (cost and quality), the regulatory environment, taxation, corruption, and the wider policy environment. These investment climate factors also determine export outcomes, both through their impact on FDI and directly through the way they shape the opportunities and constraints of domestic producers. In export‐ led growth models, FDI tends to play a particularly crucial role in catalyzing export activity, and so the relationship between the investment climate, investment, and exports is strong.

FDI is often categorized by its objectives, as either market‐seeking or efficiency‐seeking (Helpman, 1984; Markusen, 1984). For market‐seeking (or “horizontal”) FDI, investment climate certainly matters; however, factors like market access and the size of the market opportunity that the investor seeks to exploit will be critical determinants which may act as a counterbalance where the investment climate is poor. A similar situation may hold when investors seek access to particularly precious materials inputs or particularly low‐cost or high‐skilled labor. But in most cases, efficiency‐seeking (or “vertical”) FDI, which aims to make use of a country’s factors of production order to establish a platform for regional or global exports, is strongly determined by the investment climate.

The relationship between investment, particularly FDI, and the investment climate has been widely studied. The literature linking investment climate to trade and investment outcomes is extensive, but the findings show consistently that a better investment climate (often equated with meta institutions like property rights and the rule of law) is associated with higher levels of productivity, exports, and investment (c.f. Knack and Keefer, 1995; Smarzynska and Wei, 2000; Acemoglu et al, 2001; Benassy‐ Quere et al, 2007)<sup>5</sup> . Another set of literature focuses more on what may be called micro features of the investment climate, including infrastructure, trade facilitation, and business regulations. Empirical studies in this area have tended to focus on trade as the outcome rather than investment, although for at least for vertical FDI one can assume a strong correlation. Djankov, Freund, and Pham (2006) highlight the importance of trade and transport facilitation on trade outcomes, particularly for time‐sensitive products, such as those that are physically perishable of operating in global “just‐in‐time” production networks. More recently, Portugal‐Perez and Wilson (2010) assess aggregate indicators of hard and soft infrastructure in 101 developing countries and find a strong correlation between infrastructure quality and export outcomes. Eifert, Gelb, and Ramachandran (2005) show the impact of investment climate on firm‐level productivity and exports in Africa. Drawing on firm‐level surveys in eight developing countries, Dollar, Hallward‐Driemeier and Mengistae (2004) find that the investment climate – as defined by customs clearance times, infrastructure reliability, and access to financial services – is associated with firm‐level productivity and export propensity as well as with inward FDI flows.

The findings from this broad set of research supports the strong relationship between the investment climate and firm productivity. This translates into trade outcomes, although foreign investors tend to outperform domestic producers in export markets even in poor investment climates (Eifert, Gelb, and

> 5 Of course, this is not without debate. For example, Rodrik, Subramanian, and Trebbi (2004) point out that, despite their findings on the importance of property rights, investment levels are higher in China where property rights are absent than in Russia, where formal institutions are in place.

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