Abstract
The effect of a state’s financial incentives to attract foreign direct investments (FDI) is a frequent topic for both economists and policy makers. Many studies have shown that FDI are disproportionately concentrated in states with agglomeration economies. This paper uses a conditional logit model with FDI (new plants) data from 1987-1994 to explore the relationship between state efforts, state characteristics, and FDI attraction. Key results show that both promotion expenditures and agglomeration economies are important in attracting foreign plants. Results also indicate that promotion expenditures by states with small economies can partially offset location disadvantages of agglomeration (urbanization and/or localization) economies and thus appear to be a useful economic development tool as states compete for investment.
Highlights
Previous studies have demonstrated that planned new foreign-owned manufacturing plants are disproportionately concentrated in states with larger economies
This paper examines links between types of external scale economies, state promotion expenditures, and the location of foreign direct investment (FDI) in new manufacturing plants among U.S states. (A related paper in this volume, Brown, Hayes, and Taylor (2003) considers the role of state policies such as the provision of public capital in determining regional growth.) Graham and Krugman (1995) and Leichenko and Erickson (1997) present an overview of the economics of FDIs in the U.S and summarize the literature on inward FDIs to U.S regions
This paper has applied a conditional logit regression model to estimate determinants of the number of foreign direct investments in new plants in U.S states. Key results of this analysis show that both promotion expenditures and agglomeration economies are important in attracting foreign plants
Summary
Previous studies have demonstrated that planned new foreign-owned manufacturing plants are disproportionately concentrated in states with larger economies (see, for example, Coughlin and Segev 2000). A possible reason for this outcome is that states with greater population or population density as well as more manufacturing and related activity may offer location advantages because of agglomeration (urbanization and/or localization) economies. State and local governments as well as private organizations spend substantial sums of money each year on advertising and financial incentives to attract new foreign direct investment (FDI) projects. The question of whether economic development efforts pursued by states with smaller economies can at least partially offset the cost/location advantages possessed by states with larger economies has received little attention. To the extent that economic development efforts might lead to spatial dispersion of industry, it may shed light on the economic value of agglomerative forces
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