Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows

Authors


  •  Corresponding author: Beata S. Javorcik, Department of Economics, University of Oxford, Manor Road Building, Manor Road, Oxford OX1 3UQ, UK. Email: beata.javorcik@economics.ox.ac.uk.

  • We would like to thank Naotaka Sawada and Geoff Revell for assistance with data collection. We are indebted to Kelly Andrews Johnson for helpful suggestions on how to conduct an IPA Census. We thank Rita Almeida, Gabor Bekes, Andy Bernard, Antonio Ciccone, Wim Douw, Jon Fiva, C. Fritz Foley, Holger Görg, Keith Head, Bernard Hoekman, Leonardo Iacovone, Kozo Kiyota, Aart Kraay, Phil Levy, Molly Lipscomb, Bob Lipsey, Rocco Macchiavello, Will Martin, Timo Mitze, Ted Moran, Rick van der Ploeg, Jørn Rattsø, two anonymous referees, participants of the 2007 European Research Workshop on International Trade in Kiel, the 2007 Empirical Investigation in International Economics conference in Ljubljana, the 2007 Spring Meeting of Young Economists, the 2009 Royal Economic Society conference, the 2009 Empirical Investigation in Trade and Growth conference in Melbourne, the 2010 Empirical Investigation in Trade and Investment conference in Tokyo, the 2010 European Economic Association conference and seminar participants at the Norwegian University of Science and Technology, University of Oxford, Statistics Norway, the World Bank and the US International Trade Commission for useful comments. Harding is grateful for financial support from the Research Council of Norway and the Oxford Centre for Resource Rich Economies (Oxcarre).

Abstract

This study uses newly collected data on 124 countries to examine the effects of investment promotion on inflows of US foreign direct investment (FDI). We test whether sectors explicitly targeted by investment promotion agencies in their efforts to attract FDI receive more investment in the post-targeting period, relative to the pre-targeting period and non-targeted sectors. The results of our analysis are consistent with investment promotion leading to higher FDI flows to countries in which red tape and information asymmetries are likely to be severe. The data suggest that investment promotion works in developing countries but not in industrialised economies.

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