The Impact of Services Trade Regulation on FDI Inflows: Evidence from STRI in the European Union

Abstract

This thesis investigates how the level of services trade restrictiveness affects foreign direct investment (FDI) inflows in the European Union (EU). Using a panel dataset covering 20 EU countries, 12 service sectors, and the period 2014–2023, the analysis focuses on the “foreign entry” component of the OECD Services Trade Restrictiveness Index (STRI) to evaluate sector-specific effects. The results indicate that higher levels of restrictiveness, measured by STRI, are associated with lower FDI inflows, and their relationship is found to be highly heterogeneous across sectors. In traditionally regulated sectors, such as legal, air transport, postal, and accounting services, STRI has a strong negative effect on FDI. Conversely, in sectors like finance, telecommunications, ICT, and retail, restrictiveness shows a positive and significant association, potentially reflecting investor preferences for regulatory stability in high-value or network-based industries. The findings contribute to the literature on services liberalization and investment by showing that regulatory barriers matter for FDI allocation even in the absence of major reforms. They also suggest that policy design should account for sectoral differences rather than apply uniform liberalization strategies. Limitations include the restricted within-country variation in STRI, the EU-only sample, and the focus on a single STRI component. Future research could extend the analysis to capture dynamic reform effects and broader regulatory dimensions.