This study uses industry level foreign direct investment (FDI) data from 57 countries 1989-2000, to examine the host country determinants of FDI flows in services as a whole, and in the major service industries. Institutional quality and democracy appear more important for FDI in services than general investment risk or political stability. Democracy influences FDI to developing countries only, suggesting that the absence of democracy is detrimental to investment below a certain threshold. Consistent with the observation that many services are non-tradable, we find that service FDI is market-seeking, and unaffected by trade openness. We find a strong correlation between FDI in manufacturing and FDI in producers' services such as finance and transport.

Ivar Kolstad

Associated Research Professor

Espen Villanger

Deputy Director, Research Director

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