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2006 | Buch

Locational Tournaments in the Context of the EU Competitive Environment

A New Institutional Economics Approach to Foreign Direct Investment Policy Competition between Governments in Europe

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Über dieses Buch

As part of the research undertaken by the Department of Economics at the European Business School, this book explores the role that institutions play in the process of economic competition between jurisdictions for mobile investment. These "locational tournaments" are perpetuated not simply by classical factor endowments of their respective locations, but also by government interventions that impact both market imperfections and FDI flows. The resulting rivalry between competing institutional arrangements, which has been termed institutional competition, lies at the very heart of the author's analysis. The context for his research is provided by the global forces of trade and foreign direct investment that have expanded the scope for international production due to widespread liberalization of trade and capital flows, continuing regional integration, rapid technological innovations, and the resulting decrease in cross-border transaction costs. Foreign direct investment has been markedly affected by these developments. Countries depend now more heavily on foreign direct investment as a major portion of international capital flows, giving even smaller countries a greater potential and determination to compete for FDI. As a result, not only have attitudes towards FDI dramatically changed over the past decade, but so have the scope and intensity of the "'beauty contests" associated with it.

Inhaltsverzeichnis

Frontmatter

Introduction

1. Context of the Research
Abstract
The last decade has witnessed a dramatic change in attitude towards foreign direct investment (FDI) and significantly increased competition between governments to attract FDI as a result.1 Globalization, and especially the removal of national barriers to capital flows, has lead to a tremendous surge in foreign direct investment which reached a record high of almost US$1.3 trillion in 2000 — representing a growth rate of 18 percent, which is higher than those of any other global economic indicators including world production, trade or capital formation.2 This development has had a significant impact not only on economic processes but also on government policies aimed at attracting FDI. While still only a few Western countries would acknowledge investment promotion as an economic policy goal per se, all of them have set up specific policies and institutions that are aimed at attracting and regulating investment flows.3 The latter is easy to understand given that the overall distribution of FDI remains highly skewed — only 30 host countries in total account for about 95 percent of all FDI inflows, and less than 30 home countries account for 99 percent of all outward investment flows in 20024 — and competition is fierce.
2. Objective and Structure of the Study
Abstract
Against this backdrop, it seems of critical importance to address the institutional issues surrounding FDI policy competition in Europe as well as to investigate the political-economic processes that inform them. The dissertation aims to contribute to such a research program by addressing the following questions: (i) To what extent does the current EU institutional framework provide an effective solution for FDI policy competition between governments under the changing conditions for global foreign direct investment as well as current and future rounds of EU enlargement? (ii) What are alternative governance models for FDI competition? and (iii) How can the political challenges to reaching agreement on a globally or regionally-integrated investment framework be overcome?

Theoretical Framework

Frontmatter
1. Introduction
Abstract
The objective of the first chapter is to develop a theoretical framework as a “set of general assertions about the world”42 that informs the process of analysis undertaken in this dissertation. In particular, it introduces the main theories and their subsequent approaches that are being conceptually linked together as theoretical and methodological building blocks useful for the study of foreign direct investment policy competition between governments. In that regard, the chapter aims to approximate what Lakatos (1970) termed a “scientific research program”, that is, a cluster of interconnected theories consisting of a “hardcore” that must be preserved throughout the research as well as a flexible part, a “positive heuristic”, which provides rules and suggestions for further modifications of the program by the scientist.43
2. Theories of Foreign Direct Investment
Abstract
Theories of foreign direct investment have been reviewed through several theoretical lenses, and any attempt to organize them requires a determination of which structural approach to follow. As the aim of this chapter is to identify theoretical and methodological tools useful for the study of FDI policy competition as a matter of institutional choice, the structure of this section will follow the approach of Agarwal (1980), later refined by Lizondo (1991), which draws a general distinction between FDI theories that assume perfect market conditions and theories that are based on imperfect markets.45 In the latter category, those theories that explicitly consider market imperfections that affect industry structure, location advantages and transactions costs are particularly emphasized. Following this methodological path will help to accentuate the institutional economics aspect of the analysis of FDI policy competition between governments.
3. Locational Competition and Government Intervention
Abstract
Up to this point, foreign direct investment and the decision to engage in international production have been reviewed exclusively from the firm’s point of view. Even the general considerations of locational factors, which are the domain of the nation-states or — more specifically — their respective governments, have not led to an examination of how government intervention affects both market imperfections as well as FDI flows. Since this issue goes to the heart of the analysis of FDI policy competition, in this intervening part of the chapter a reassessment of the locational dimension is undertaken, which examines the underlying — and potentially conflictual — relationship between firms’ objectives and governments’ interests. In that context, first the neoclassical approach to locational competition is reviewed, followed by an analysis of its implications and shortcomings, which leads to the proposition of an expanded model of FDI policy competition in the final part of this section.
4. The New Institutional Economics Theory
Abstract
All markets need institutions in order to function properly. From the simplest exchange transaction that is governed by the rules of business, cultural norms or traditions to the most complex decision-making procedure that involves strategic uncertainty and limited information, our behavior is shaped by formal and informal institutions that help to facilitate order in daily social and economic interactions and reduce uncertainty in exchange. While an explicit acknowledgement of this fundamental role of institutions in socio-economic life might seem superfluous and obvious to the reader with a non-economics background,188 it is a fact that the prevailing neoclassical theory treats institutions as a highly abstract matter as well as exogenously given, and thus inconsequential, in economic processes. The New Institutional Economics (NIE) attempts to address this shortcoming from an economic science’s point of view. The final part of this chapter will, therefore, review some of the main ideas of this theory, along with complementary, yet different, approaches suggested by two NIE scholars — Douglass North and Oliver Williamson — that are relevant to the analysis at hand. This process will serve to highlight the role and importance of institutions in general as well as their significance for FDI government competition in particular.

Governance of Foreign Direct Investment Policy Competition in Europe

Frontmatter
1. European FDI Competition in Perspective
Abstract
Europe as a region presents itself as a formidable candidate for the study of FDI competition. First of all, Europe is the most dynamic region in terms of FDI activity, both as a host as well as home destination to global FDI flows. Second, the European FDI competition framework is arguably the most comprehensive and sophisticated in the world, and sufficiently long established to draw preliminary conclusions about its effectiveness. Third, the current and future process of EU enlargement enhances the study by adding a dynamic element due to the ongoing harmonization efforts between old and new member countries. This chapter will examine the first two issues in detail, setting the stage for the discussion of the third issue in Chapter 4.
2. The Institutional Environment for Policy Competition in Europe
Abstract
The main actors engaged in locational competition in Europe are the nation states that drive competition for mobile investment among host locations (more or less active depending upon their respective attitudes toward investment promotion) through a mix of FDI policies aimed at creating a favorable investment climate, reducing costs to investors through tax incentives, grants or other mechanisms, and conducting promotional activities in the areas of information dissemination, image building and investor servicing. The same measures have also been mirrored on a subnational level, in particular in the area of incentives, which have become a major policy instrument for regional and local governments.
3. Governance Models for Investment Promotion in Europe
Abstract
A key issue, which emerged in the context of the theoretical framework in Chapter 2, concerns the institutional aspect of FDI competition between governments, and the need to analyze locational competition not just within the neoclassical framework of the “two-dimensional range of price theory, which examines only price and quantity”,374 but also to consider investment promotion as another area in which governments compete. To follow-up on this point, the underlying institutional governance structure of the competitive process, which involves national or local governments and Investment Promotion Agencies as their agents, will be examined.

Harnessing the Power of FDI Competition: An EU Policy Agenda

Frontmatter
1. Evaluating the Overall Effectiveness of FDI Competition
Abstract
The issue of the effectiveness of open competition for foreign direct investment is generally overshadowed by the much larger question about the impact of FDI on economic growth and development. On the positive side, FDI has the potential to bring employment, capital, technology and knowledge to a country. It can also increase income, foreign exchange, and stimulate domestic investment. Moreover, so called spill-over effects can raise productivity of local firms, lower the cost of R&D and innovation, stimulate the establishment of local supplier networks, and generally facilitate an increased integration in global markets. On the negative side, FDI is associated with the risk of lowered domestic savings and investment, the crowding-out of local firms in capital markets, distorted competition, diminished regulatory standards, and the absence of expected spillover effects.
2. Reviewing the EU Approach to Regulating FDI Policy Competition
Abstract
The main conclusion of the positive analysis of FDI policy competition in Europe presented in Chapter 3 is that the EU possesses a sophisticated competition framework that represents a “considerable success in cooperation and policy coordination”.466 It suggested that EU institutions and governance mechanisms in this area are, in principle, well designed to be effective monitoring and enforcement mechanisms to support the goal of establishing ex ante arrangements for contract governance to save on ex-post transaction costs.467 The following section takes a closer look at the extent to which the overall EU competition framework also represents an effective solution to overcome FDI policy competition issues.
3. Regional Integration and FDI Competition
Abstract
The process of current and future enlargement of the EU adds another dynamic element to the challenges facing the Commission in reforming the existing framework for FDI competition. Here, the balancing act for accession countries and the EU alike is to align the (mostly non-conforming) FDI policies and instruments in the new member countries with the EU competition Aquis, while at the same time allowing the newcomers to maintain a competitive framework for FDI. An effective solution to this issue will depend both on substance as well as the overall approach applied to the process of policy integration. The following sub-chapter will address these issues from an institutional point of view, backed by empirical data.
4. Institutional Issues and Policy Implications
Abstract
The chapter so far has examined in detail the overarching research question of the dissertation, i.e., to what extent does the current EU institutional framework provide an effective and efficient solution for FDI policy competition between governments under changing conditions for global foreign direct investment as well as current and future rounds of EU enlargement. The last section will summarize the arguments that support the thesis that institutional governance instruments of FDI policy competition in the EU are overstretched and in need of reform, and suggest potential normative solutions to overcome these institutional weaknesses. The chapter will conclude by reviewing the global context surrounding this policy agenda, which shall also serve as segue into the political economy of FDI policy competition presented in the following Chapter 5.

Political Economy Aspects of FDI Policy Competition

Frontmatter
1. International Regime Theory and Foreign Direct Investment
Abstract
In his book, “U.S. Power and the Multinational Corporation”, Gilpin (1975) asserts that the trouble with removing the artificial line that separates the political and economic sub-systems lies in the fact that “economists do not really believe in power, [and] political scientists, for their part, do not really believe in markets”.571 Indeed, since Gilpin’s first attempt thirty years ago to establish a political economy of foreign investment, much of the writing by economists and political scientists on that subject has been “as if they were talking about entirely different sets of actors and activities”.572 The following analysis assumes the relationship between economics and politics to be a reciprocal one, and should therefore be understood as an attempt to qualify FDI governance-related suggestions made in previous normative sections in the context of international and domestic politics.
2. Institutional Choice and Cooperation in FDI Competition
Abstract
Charlton (2003) suggests that policy-makers faced with establishing cross-national or cross-jurisdictional FDI governance measures are confronted with three general choices, depending on their level of ambition and resources: (1) creating transparency enhancing measures; (2) establishing cooperation between jurisdictions; and (3) instituting binding and enforceable multilateral rules.603 The following section reviews these options from a regime-theoretic view.
3. Is the EU Competition Framework a Model for International FDI Regimes?
Abstract
The prior discussion of institutional policy choices for FDI governance led to the conclusion that reaching agreement on any of these options — even the most simple ones such as creating a more transparent and accountable system of subsidy controls — will not take place unless there is a sufficient balance of domestic interests and power capabilities as well as an appropriate regime design that ensures mutual trust and discourages opportunistic behavior. In that context, the EU framework does not only present itself as an effective mechanism of bounded FDI competition661 but also provides important lessons on the political-economic process for reaching consensus on the choice of FDI governance model. The final section will thus review the most important factors that contributed to the process and its outcomes, both in terms of overall guiding-principles of the institutional environment (“rules of the game”) as well as the more specific governance approach (“play of the game”) that informed the EU’s course. In conclusion, recommendations will be given as to whether or not the EU approach can serve as a model for the establishment of other FDI regimes.

Conclusions

VI. Conclusions
Abstract
The main purpose of this dissertation was to elucidate the issue of economic competition between jurisdictions for mobile investment. More specifically, the focus was on those institutional factors shaped by government influence and behaviour that compete with each other in the realm of global locational tournaments. This process, termed institutional competition, was analyzed through the methodological framework of the New Institutional Economics which posits that institutions matter in reducing uncertainty and structuring human exchange, and as such helped to address the underlying questions of strategic behaviour and global coordination problems inherent in FDI policy competition. Using the example of the EU’s competition framework, the main research question aimed to determine whether or not a multilateral system of investment rules can be economically and politically effective as well as to address the corollary question of what constitutes a viable arrangement for inter-jurisdictional and inter-regional FDI governance.
Backmatter
Metadaten
Titel
Locational Tournaments in the Context of the EU Competitive Environment
verfasst von
Stephan J. Dreyhaupt
Copyright-Jahr
2006
Verlag
DUV
Electronic ISBN
978-3-8350-9109-2
Print ISBN
978-3-8350-0280-7
DOI
https://doi.org/10.1007/978-3-8350-9109-2