FDI inflows in Europe: Does investment promotion work?

Riccardo Crescenzi,Marco Di Cataldo,Mara Giua

doi:10.1016/j.jinteco.2021.103497

Abstract

Can active investment promotion efforts attract FDI towards areas and sectors that would not otherwise be targeted? This paper leverages an ad hoc survey on national and sub-national Investment Promotion Agencies (IPAs) in Europe and applies state-of-the-art policy evaluation methods to estimate the impact of IPAs on FDI attraction. The results show that FDI responds to IPAs even in advanced economies. Sub-national IPAs, operating in closer proximity to investors' operations, attract FDI in particular towards less developed areas where market and institutional failures are stronger. IPAs influence FDI over and above other policies targeting the general economic improvement of the host economies. Impacts are concentrated in knowledge-intensive sectors where collaborative systemic conditions are more relevant. IPAs work best for less experienced companies - ‘occasional’ investors - more likely to suffer from institutional failures. Finally, IPAs are equally effective in attracting companies from both outside and inside the EU Single Market even if the latter are less likely to suffer from regulatory or information asymmetries. Overall, this evidence sheds new light on the role of sub-national IPAs as local ‘institutional plumbers’ in support of foreign investors and their operations.

Highlights

In a context of increasingly competitive capital markets, the attraction of Foreign Direct Investments (FDI) has taken centre stage in public policies worldwide
Our analysis focuses on Europe, a context in which investment promotion agencies represent a widespread policy to attract FDI
In order to test whether the effect of regional Investment Promotion Agencies (IPAs) is exclusively driven by sectortargeting strategies, or whether ‘horizontal’ strategies are effective, in Table A4 we present the results of a model including different treatment dummy variables identifying whether the agency selects some key sectors for targeting inward FDI, or whether the agency does not prioritise any particular sector and instead targets FDI in all sectors

Summary

Introduction

In a context of increasingly competitive capital markets, the attraction of Foreign Direct Investments (FDI) has taken centre stage in public policies worldwide. The establishment of Investment Promotion Agencies (IPAs) has progressively diffused as one of the leading policy initiatives to attract FDI. Countries with no active IPAs constitute only a small minority in the world (OECD, 2015). In addition to national IPAs, whose competence covers an entire country, sub-national IPAs have become the norm across the globe. The activity of IPAs is an essential component of both national and local government strategies to attract inward investment. National and sub-national IPAs registered at the World Association of Investment Promotion Agencies (WAIPA) have increased from 112 in 2002 to 170 in 2018

Methods

Results

Conclusion