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Short-Run Strategies For Attracting Foreign Direct Investment

Author

Listed:
  • Rodolphe Desbordes

    (Department of Economics, University of Strathclyde)

  • Céline Azémar

    (Department of Economics, University of Glasgow)

Abstract
This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982-1994 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Suggested Citation

  • Rodolphe Desbordes & Céline Azémar, 2010. "Short-Run Strategies For Attracting Foreign Direct Investment," Working Papers 1005, University of Strathclyde Business School, Department of Economics.
    • Handle: RePEc:str:wpaper:1005
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    3. Olney, William W., 2013. "A race to the bottom? Employment protection and foreign direct investment," Journal of International Economics, Elsevier, vol. 91(2), pages 191-203.
    4. Norbäck, Pehr-Johan & Duanmu , Jing-Lin & Skedinger, Per, 2012. "Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data," Working Paper Series 935, Research Institute of Industrial Economics.
    5. Niklas Potrafke, 2013. "Globalisierung und Arbeitsmarktinstitutionen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 66(04), pages 32-35, March.
    6. Alvaro Cuervo-Cazurra & Bernardo Silva-Rêgo & Ariane Figueira, 2022. "Financial and fiscal incentives and inward foreign direct investment: When quality institutions substitute incentives," Journal of International Business Policy, Palgrave Macmillan, vol. 5(4), pages 417-443, December.
    7. repec:wsr:wpaper:y:2011:i:076 is not listed on IDEAS
    8. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
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    10. Thompson, Edmund R. & Dericks, Gerard H. & Fai, Felicia, 2019. "Development and validation of a firm-level vertical and horizontal internationalization metric," International Business Review, Elsevier, vol. 28(3), pages 533-543.
    11. Yerrabati, Sridevi & Hawkes, Denise Donna, 2016. "Institutions and Investment in the South and East Asia and Pacific Region: Evidence from Meta-Analysis," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-48.
    12. Antonakakis, Nikolaos & Tondl, Gabriele, 2012. "Do determinants of FDI to developing countries differ among OECD investors? Insights from Bayesian model averaging," Discussion Papers 1/12, Europa-Kolleg Hamburg, Institute for European Integration.
    13. World Bank Group, 2017. "Investment Policy and Promotion Diagnostics and Tools," World Bank Publications - Reports 28281, The World Bank Group.
    14. Falk, Martin, 2016. "A gravity model of foreign direct investment in the hospitality industry," Tourism Management, Elsevier, vol. 55(C), pages 225-237.
    15. Stocker, Marshall L., 2016. "The price of freedom: A Fama–French freedom factor," Emerging Markets Review, Elsevier, vol. 26(C), pages 1-19.
    16. Vishaal Baulkaran & Nathaniel C. Lupton, 2020. "U.S. FDI and Shareholder Rights Protection in Developed and Developing Economies," Multinational Finance Journal, Multinational Finance Journal, vol. 24(3-4), pages 155-182, September.
    17. Hawkes, Denise Donna & Yerrabati, Sridevi, 2015. "Institutions and investment in South and East Asia & Pacific region: Evidence from meta-analysis," Economics Discussion Papers 2015-62, Kiel Institute for the World Economy (IfW Kiel).
    18. Dorożyński Tomasz & Urbaniak Wojciech & Świerkocki Janusz, 2015. "The Location Premises Of FDI In Poland. The Case Of The Lodz Province / Przesłanki Lokalizacji Biz w Polsce. Przykład Regionu Łódzkiego," Comparative Economic Research, Sciendo, vol. 18(4), pages 157-178, December.
    19. Azémar, Céline & Desbordes, Rodolphe & Wooton, Ian, 2020. "Is international tax competition only about taxes? A market-based perspective," Journal of Comparative Economics, Elsevier, vol. 48(4), pages 891-912.
    20. INADA Mitsuo, 2019. "Promotion or Liberalization: The Effect of Targeted Investment Policies on FDI Inflows," Discussion papers 19071, Research Institute of Economy, Trade and Industry (RIETI).
    21. repec:wsr:ecbook:2010:i:iv-002 is not listed on IDEAS
    22. Sjöholm, Fredrik, 2021. "Industrial Policy and Foreign Direct Investment," Working Paper Series 1400, Research Institute of Industrial Economics.

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    More about this item

    Keywords

    Foreign direct investment; fiscal incentives; regulations; market potential; spatial;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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