Skip to main content
SpringerLink
Log in

The role of public policy in closing foreign direct investment gaps: an empirical analysis

  • Original Paper
  • Published:
Empirica Aims and scope Submit manuscript

Abstract

Using public policy instruments to attract Foreign Direct Investment (FDI) has become standard in most countries, irrespective of their level of development, geographical location or industrial structure. Against this background the paper analyses the suitability of various public policies to attract inward FDI based on a sample of 11 countries and 10 industries from the manufacturing sector over 10 years. For this aim we derive an empirical baseline model of the determinants of inward FDI-stock. From this baseline model FDI-gaps—measured as the difference between the “estimated actual” inward FDI-stock and the “potential” FDI-stock, which could be realized if a certain “best practice policy” were carried out—are derived. Thereby the analysis focuses on business taxation, public research and development expenditures, the information and communication infrastructure endowment, labor costs as well as institutional and skill-related policies. The analysis inter alia reveals the share of each of these location factors in the total industry- and country-level FDI-gap. Moreover, the analysis explores how policy advice depends on the definition of the “best practice policy”.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. The EU countries included are: Austria (AUT), Finland (FIN), France (FRA), Great Britain (GBR), The Netherlands (NLD), Germany (GER), the Czech Republic (CZE), Hungary (HUN), Slovenia (SVN) and Slovakia (SVK).

  2. These variables are titled “policy variables” throughout the paper.

  3. However, Helpman (2006) argues, “… the traditional classification of FDI into vertical and horizontal forms has become less meaningful in practice. Large multinationals invest in low-cost countries to create export platforms from which they serve other countries around the world ….” (p. 590) Thus, in this paper, we do not classify the determinants into market- and efficiency-related factors.

  4. The level of political risk decreases with an increase in the value of the risk variable chosen.

  5. We do not present detailed results of the general-to-specific-approach to limit the length of the paper. These are however made available upon request.

  6. For comparison the “Appendix” (Tables 9, 10, 11, 12) contains FDI-gaps calculated on the results from the random effects estimator with two-years-lagged variables.

  7. Table four also shows that the AR(1) and AR(2) tests as well as the Hansen-J-test for the AB estimator are in favor of the validity of the GMM estimates.

  8. Note, that the labor costs variable is insignificant in the fixed effects specification. Yet, its coefficient is comparable to that of the random effects specification. The insignificance, thus, can be seen as an indication of the inefficiency of the fixed effects estimator.

  9. Using minimum/maximum values in our study leads to a range of total FDI-gaps between 9 and 33%. Results can be received upon request.

  10. An exception is the textile industry in the US.

  11. For example, industries may be clustered by important characteristics like R&D intensity or educational intensity, export propensity, scale intensity etc.

Abbreviations

FDI:

Foreign Direct Investment

R&D:

Research and Development

CEECs:

Central and East European Countries

References

  • Barba Navaretti G, Venables AJ (2004) Multinational firms in the world economy. Princeton University Press, Princeton

    Google Scholar 

  • Bellak C, Leibrecht M, Riedl A (2008) Labour costs and FDI flows to the CEECs: a survey of the literature and some empirical evidence. Struct Chang Econ Dyn 19:17–37

    Article  Google Scholar 

  • Bellak C, Damijan J, Leibrecht M (2009) Infrastructure endowment and corporate income taxes as determinants of foreign direct investment in Central- and Eastern European Countries. World Econ 32(2):267–290

    Article  Google Scholar 

  • Bénassy-Quéré A, Coupet M, Mayer T (2007a) Institutional determinants of foreign direct investment. World Econ 30(5):764–782

    Article  Google Scholar 

  • Bénassy-Quéré A, Gobalraja N, Trannoy A (2007b) Tax and public input competition. Econ Policy 22(5):385–430

    Article  Google Scholar 

  • Bevan AA, Estrin S (2004) The determinants of foreign direct investment into European transition economies. J Comp Econo 32:775–787

    Article  Google Scholar 

  • Buch CM, Lipponer A (2007) FDI versus exports: evidence from German banks. J Bank Finance 31:805–826

    Article  Google Scholar 

  • Cameron AC, Trivedi PK (2005) Microeconometrics: methods and applications. Cambridge University Press, Cambridge

    Google Scholar 

  • Clausing KA, Dorobantu CL (2005) Re-entering Europe: does European Union candidacy boost foreign direct investment? Econ Transit 13(1):77–103

    Article  Google Scholar 

  • De Santis R, Vicarelli C (2007) The Determinants of FDI Inflows in Europe: the role of the institutional context and Italy’s relative position. Rivista di Politica Economica SIPI-Confindustria, Roma (http://ssrn.com/abstract=986538)

  • Demekas DG, Balász H, Ribakova E et al (2007) Foreign direct investment in European transition economies—the role of policies. J Comp Econ 35(2):369–386

    Article  Google Scholar 

  • DeMooij RA, Ederveen S (2005) How does foreign direct investment respond to taxes? A meta analysis. Paper presented at the Workshop on FDI and Taxation. GEP Nottingham, October

  • Devereux MP, Griffith R (1998a) Taxes and the location of production: evidence from a panel of US multinationals. J Public Econ 68(3):335–367

    Article  Google Scholar 

  • Devereux MP, Griffith R (1998b) The taxation of discrete investment choices. IFS Working paper series no. W98/16

  • Egger P, Pfaffermayr M (2004) Foreign direct investment, European integration in the 1990s. World Econ 27(1):99–110

    Article  Google Scholar 

  • Girma S, Greenaway D, Kneller R (2005) Does exporting increase productivity? A microeconometric analysis of matched firms. In: Greenaway D (ed) Adjusting to globalization. Blackwell, Oxford, pp 131–142

    Google Scholar 

  • Guimón J (2009) Government strategies to attract R&D-intensive FDI. J Technol Transf 34(4):364–379. doi 10.1007/s10961-008-9091-1

    Article  Google Scholar 

  • Head K (2003) Gravity for Beginners. Mimeo, University of British Columbia

  • Helpman E (2006) Trade, FDI and the organization of firms. J Econ Lit XLIV:589–630

    Article  Google Scholar 

  • Markusen JR, Maskus KE (2002) Discriminating among alternative theories of the multinational enterprise. Rev Int Econ 10(4):694–707

    Article  Google Scholar 

  • Mollick AV, Ramos-Duran R, Silva-Ochoa E (2006) Infrastructure and FDI into Mexico: a panel data approach. Glob Econ J 6(6):1–25

    Google Scholar 

  • Mutti JH (2004) Foreign direct investment and tax competition. Institute for International Economics, Washington

    Google Scholar 

  • Mutti JH, Grubert H (2004) Empirical asymmetries in foreign direct investment and taxation. J Int Econ 62(2):337–358

    Article  Google Scholar 

  • Resmini L (2000) The determinants of foreign direct investment in the CEECs. Econ Transit 8(3):665–689

    Article  Google Scholar 

  • Roodman D (2006) How to Do xtabond2: an introduction to “Difference” and “System” GMM in Stata. Working Paper 103. Center for Global Development, Washington

  • Stöwhase S (2005) Tax rate differentials and sector specific foreign direct investment: empirical evidence from the EU. Finanzarchiv 61(4):535–558

    Article  Google Scholar 

  • Verbeek M (2008) A guide to modern econometrics, 3rd edn. Wiley, Chichester

    Google Scholar 

  • Wooldridge JM (2002) Econometric analysis of cross section and panel data. MIT-Press, Cambridge

    Google Scholar 

  • Yeaple SR (2003) The role of skill endowments in the structure of US outward foreign direct investment. Rev Econ Stat 85(3):726–734

    Article  Google Scholar 

Download references

Acknowledgments

We would like to thank the anonymous referee for valuable comments. This contribution originates from the study “Policies to Attract Foreign Direct Investment: An Industry-Level Analysis” commissioned by the Austrian Federal Ministry of Economics and Labour (BMWA) within the scope of the Research Centre International Economics (FIW), funded by the Internationalisation Program “go International”.

Author information

Authors and Affiliations

  1. Department of Economics, Vienna University of Economics and Business, Augasse 2-6, 1090, Vienna, Austria

    C. Bellak

  2. Research Institute for International Taxation and Department of Economics, Vienna University of Economics and Business, Augasse 2-6, 1090, Vienna, Austria

    M. Leibrecht

  3. The Vienna Institute for International Economic Studies (wiiw), Rahlgasse 3, 1060, Vienna, Austria

    R. Stehrer

Authors
  1. C. Bellak
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. M. Leibrecht
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. R. Stehrer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to C. Bellak.

Appendix

Appendix

See Tables 7, 8, 9, 10, 11, and 12.

Table 7 Classification of industries
Full size table
Table 8 Shares of the policy variables in industry-specific gap by country, industry and policy variable in % (2004)
Full size table
Table 9 Total country gap and industry-specific gaps (2004) for random effects model with two-years-lagged variables (overall sample mean value as “best practice policy”)
Full size table
Table 10 Total country gap and shares of policy variables in total country gap in percent (2004) for random effects model with two-years-lagged variables (overall sample mean value as “best practice policy”)
Full size table
Table 11 Total country gap and industry-specific gaps (2004) for random effects model with two-years-lagged variables (country group-specific mean value as “best practice policy”)
Full size table
Table 12 Total country gap and shares of policy variables in total country gap in percent (2004) for random effects model with two-years-lagged variables (country group-specific mean value as “best practice policy”)
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Bellak, C., Leibrecht, M. & Stehrer, R. The role of public policy in closing foreign direct investment gaps: an empirical analysis. Empirica 37, 19–46 (2010). https://doi.org/10.1007/s10663-009-9107-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10663-009-9107-6

Keywords

JEL classifications

Search

Navigation