The Impact of Regulatory Divergence in Non-Tariff Measures on the Cross-Border Investment of Multinationals

In this paper, we study the effects of international regulatory divergence in non-tariff measures on the cross-border investment of multinational firms. We verify two main research hypotheses derived from the modified knowledge-capital model of the multinational enterprise. The first hypothesis postulates that when regulatory divergence with numerous regulatory measures in the destination emerges, trade cost also increases—stimulating horizontal multinational activity. The second hypothesis states that regulatory convergence could reduce the trade costs between the two trading partners, facilitating vertical multinational activity. To verify these hypotheses, we use firm-level data from the Orbis database for 2004–2020 and the Poisson pseudo-maximum likelihood (PPML) estimation technique. Our estimation results for the full sample of firms show that greater regulatory divergence is negatively associated with the extent of multinational activity. In addition, the convergence of technical barriers to trade seems more important than the convergence of sanitary and phytosanitary measures. Moreover, more productive firms can overcome problems associated with both technical barriers to trade and sanitary and phytosanitary distances. Finally, we find significant heterogeneity across sectors that varies according to technology intensity.