Further, Barattieri, Bochert, and Mattoo (2014) find that policies that seem to matter the most to mergers and acquisitions are restrictions on setting up branches, rules on the nationality of employees, and lack of transparency in license denials. Their study provides intriguing evidence that policy effectiveness is state‐dependent. Specifically, large shares of manufacturing and services in GDP seem to allow host countries to maintain more restrictive regimes without deterring mergers and acquisitions in services.

This effect might be sizeable. The authors estimate that in Botswana the same liberalization policy lowering the Services Trade Restrictiveness Index would have an impact about five times as large as in Vietnam—which has a larger share of manufacturing in GDP—in terms of both the probability and number of merger and acquisition deals. Alternatively, the same policy restriction would have much larger negative effects in Botswana than in Vietnam. These results might help explain why policy restrictions have inhibited services investment less in the industrializing economies of Southeast Asia than in other regions.

Such research has multiple implications. First, there seems to be a strong case for easing restrictions on FDI, including for liberalization of services which, among other benefits, generates significant positive spillovers to the manufacturing sector (discussed in section II). Second, eliminating restrictions on services can have different effects on FDI, and evidence suggests that countries’ industrial structure matters quite a lot. Third, there might be spillover effects between FDI policies toward services and manufacturing— given that FDI in services seems to follow FDI in manufacturing. However, the extent to which these are interdependent is subject to further research.

Other remaining questions include whether policy effectiveness might also depend on other factors, such as the orientation of FDI. For example, market‐seeking investors looking to supply established local manufacturers might have stronger incentives to enter a country—even in the presence of restrictive policies—than export‐oriented service providers seeking cost efficiency or specialized local skills, as they can choose from a wider set of investment locations. Other considerations might apply to investors acquiring service providers as strategic assets with the goal of diversifying their international portfolios. Investigating these aspects would be useful because countries might prefer to target different types of services.

# **_C. Investment retention: The importance of investor confidence_**

Investor concerns about government conduct are at the top of corporate agendas. The 2014 Political Risk Survey by the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) finds that investors from industrial and developing countries continue to rank political risk as one of the main constraints to foreign investment (MIGA 2014). Of 459 senior executives interviewed, 41 reported the cancellation of investment plans or withdrawal of existing investment due to adverse regulatory changes, 27 due to breach of contract, and 26 due to restrictions on currency transfer in the year preceding July 2013. Moreover, concerns about political risk are increasing. Though 47 percent of investors planned to increase FDI, 37 percent intended to neither increase nor decrease investments in the year following July 2013— compared with 70 percent and 15 percent, respectively, in the years before. Investment retention is 20