foreign ownership limit and in some cases prohibit FDI in certain sectors. But abolishing foreign ownership restrictions and having a completely open economy do not guarantee success in attracting more FDI. Traditional factors such as market size and growth potential will continue to be the main drivers of global FDI flows. But previous waves of economic reforms did succeed in attracting large inflows of FDI, however, and further reforms – in areas such as trade liberalization, infrastructure deepening, and human capital strengthening – will help overcome existing weaknesses in the economies and enable them to attract more and better benefit from foreign capital inflows. Moreover, poor investment climates (such as ones imposing entry restrictions) put their economies in a sub-optimum position not only to attract, but, as importantly, to reap fully the benefits of FDI, such as transfer of technology and know-how through spillovers and linkages as well as access to international markets. Lacking such reforms and improvements in the investment climate, economies find it difficult to attract their share of FDI and more generally, to reach their economic potential.

One important component of such reform efforts to attract FDI must be for economies to continue to offer an attractive investment climate. Many economies in the world have largely succeeded in removing the most significant regulatory barriers to foreign investment, but further reforms targeting more nuanced regulatory areas may be a key step to stay at the forefront of attracting global FDI. Other economies still have a way to go to offer a conducive environment for FDI flows.

Once investors are informed as to whether the sector of activity is open to foreign equity ownership in the host economy, they need to assess the process for establishing a foreign investment in this sector. Easing business start-up is another important area where the government can implement positive changes. Over the years, research has shown that companies seek to avoid administrative hurdles when setting up business in foreign economies. A study measuring restrictions on FDI in the service sector finds that the difficulty of navigating the various requirements for starting a foreign investment can have an important impact on companies’ investment decisions (Golub and Ling, 2006). Research also shows that stricter regulation of entry is associated with higher levels of corruption, and a greater relative size of the unofficial economy (Djankov et al., 2002).

As part of the _FDI Regulations_ project, two surveys were used to gather the data outlined here: _Investing Across Sectors_ and _Starting a Foreign Investment_ . They answer the following questions: Which economies impose equity ownership restrictions to foreign investors and which procedural barriers do foreign companies face when establishing foreign-owned subsidiaries in these economies? The _FDI Regulations_ indicators analyze laws, regulations, and practices affecting foreign investment in 103<sup>3</sup> economies. The indicators focus on five thematic areas to measure how foreign companies invest across sectors, start a foreign-owned business, arbitrate commercial disputes, convert and transfer currency, and employ skilled expatriates. The indicators compare economies to identify good practices, stimulate reforms, and provide cross-country data for research and analysis. The project’s methodology is based on the World Bank Group’s _Doing Business_ initiative.<sup>4</sup>

# **_b. What is measured by the indicators_**

The _Investing Across Sectors_ indicators focus on identifying whether there are legal restrictions on equity ownership for new foreign investment projects. The indicators measure ownership restrictions across 32 sectors grouped into 12 sector groups for presentation and analysis purposes and report on a scale of 0 to 100 the degree of openness to foreign direct investment (new greenfield investment) in the

> 3 The analysis is based on data across 103 economies for the topic covering foreign equity ownership restrictions and 102 economies for the topic covering establishment processes

> 4 World Bank Group. Various Years. _Doing Business_ . Washington, D.C. http://www.doingbusiness.org.

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