The CTC indicators have an even stronger association with FDI inflows per capita. This alternative measure of FDI captures the volume of foreign investment being made available per person across economies. Figure 12 shows the relation between the CTC indicators and average FDI inflows per capita, which has a very strong correlation of 0.427 and is highly significant. This association remains statistically significant even when controlling for the size of GDP across economies, as well as if outlier economies Ireland, Singapore, and Hong Kong SAR, China are included, reflecting a more robust relation between the CTC indicators and this measure of FDI.

As with the other correlations, this does not suggest that a more open foreign exchange regime would necessarily lead to more inflows of FDI per capita. This association could reflect instead that higher levels of FDI flows encourage increased openness to cross-border transactions, for example. More Figure 12: Five-year average of FDI inflows per capita have even stronger correlation with CTC indicators <!-- Start of picture text --> 2,500<br>2,000<br>1,500<br>1,000<br>500<br>0<br>0 20 40 60 80 100<br>CTC average indicator score per economy<br>2007-11 average (USD)<br>Inward FDI flows per capita,<br><!-- End of picture text --> Note: three economies are omitted as outliers with more than $3,000 in inflows per capita (Ireland, Singapore, and Hong Kong SAR, China). The Pearson correlation is 0.427 and is highly significant. With the outliers included, the correlation is 0.287, still significant at the 1% level.

Source: UNCTADstat for FDI data.

robust econometric analysis would consider additional factors considered to be determinants of FDI, such as GDP growth, availability of natural resources, and macroeconomic stability. But these associations do suggest that the CTC indicators are measuring relevant aspects of the foreign exchange regime across economies, and the new data will hopefully enable further research to better understand the relationship between foreign exchange regimes and global FDI.

# 7. Policy implications and regulatory reform considerations

The CTC indicators identify common types of foreign exchange restrictions across economies, including requiring government approval for cross-border transactions; restricting how or when certain payments abroad may be made; and limiting firms’ ability to hold foreign exchange earnings. The indicators also show that there is significant variation in the economies that impose such restrictions. High-income economies have generally unrestricted regimes, and 38% of low- and lower-middle income economies have moderate or heavy restrictions in place; but another 38% of lower-income economies have open foreign exchange regimes for FDI, suggesting that being at an earlier stage of economic development is not necessarily a barrier to removing restrictions. Existing research has found that foreign exchange openness can attract FDI, and correlations between CTC data and measures of economic performance suggest that the indicators measure relevant aspects of the foreign exchange regime for FDI.

This benchmarking and analysis suggests that removing restrictions on converting and transferring currency may be a viable regulatory reform option in many economies. It should be stressed that any relaxation of restrictions is a complex process, and has to be grounded in the specific macroeconomic, structural, and financial sector conditions in any given economy. As noted in Section 2, the removal of one control can undermine the effectiveness of other controls, and reforms to liberalize the regime for 14