# **_Legal and regulatory environment_**

The literature generally finds laws, regulations, and policies relating to FDI (e.g., foreign ownership restrictions, investment approval mechanisms, regulations governing operations) to be crucial for attracting new investment and retaining existing investors. Part of North’s (1990) conceptualization of institutions as “rules of the game”, the legal and regulatory environment for FDI shapes investment performance in host countries. Once investments are made, FDI is partially ‘sunk’, rendering it particularly sensitive to regulatory uncertainty (Saggi, 2002). In addition to uncertainty, a suboptimal business environment increases transaction costs, effectively constituting a tax on business activity (Buchanan, Le, & Rishi 2012).

A sizable body of research suggests that improvements in the quality of a country’s legal and regulatory environment are associated with higher FDI inflows. Mistura and Roulet (2019) find that legal restrictions on FDI decrease FDI inflows to both developed and developing countries. The quality of institutions governing the business environment—measured in terms of bureaucratic efficiency, corruption levels, and property rights protections—also has a statistically significant effect on FDI (Ali, Fiess, & MacDonald, 2010; Bénassy-Quéré, Coupet & Mayer, 2007; Bevan, Estrin & Meyer, 2004; Egger & Winner, 2005; Fung et al. 2005; Globerman & Shapiro 2002; Kinda 2010; Richards & Nwankwo, 2005; Staats and Biglaiser, 2012). Evidence from surveys of investors and foreign businesses reinforces empirical evidence that a supportive business climate is among the top priorities for foreign investors (A. T. Kearney 2019; Asiedu, 2006, Campos, Lien, & Pradhan, 1999; Gastanaga, Nugent & Pashamova, 1998; Kusek and Silva 2018; Smarzynska 1999; Wei 2000).

# **_Political risk and investor protection_**

Foreign businesses in host countries are exposed to the risk of disruption by political and government actions. Such political risks emanate from host country governments’ failure to honor explicit and implicit contracts with investors (Graham, Johnston, and Kingsley 2016). Specific sources of political risk include currency and transfer restrictions, unexpected changes in laws and regulations, expropriation by the government, breach of contract, and failure to honor guarantees (Fitzpatrick 1983; Henisz and Zelner 2010; Howell and Chaddick 1994; Graham, Johnston, and Kingsley 2016).

The empirical literature on FDI determinants in developing countries consistently shows that the effect of political risk on FDI is statistically significant and that high levels of political risk deter FDI inflows. Regulatory risk (Hebous, Kher, and Tran, 2020), poor institutional quality (Alfaro, Kalemli-Ozcan, and Volosovych 2008), corruption (Wei 2000), and poor property rights protections (Henisz 2000, 2002; Papaioannou 2009) can all be major deterrents to FDI inflows to developing countries. Conversely, countries that undertake investment reforms to lower political risks faced by foreign investors significantly improve FDI inflows (Biglaiser & DeRouen 2006; Krifa-Schneider & Matei 2010). Looking across affiliates, some research suggests that affiliate-specific attributes such as access to information and capital availability can affect the degree to which FDI is exposed to political risk (Barry and DiGiuseppe 2019; Graham, Johnston, and Kingsley 2016).

# **_Investment promotion_**

National and subnational investment promotion agencies (IPAs)—institutions with mandates to promote and facilitate investment—have proliferated over the past two decades. Some observers maintain that 3