Impact of investment policies on German direct investment in developing countries : an empirical investigation

By using better data on German foreign direct investment (FDI) than previous studies, the author found that: (i) developing countries might attract more FDI flows by easing investment restrictions or implementing incentives - but the effect of incentives could be modest and does not justify costly subsidies; (ii) a source country's policy instrument (public garantees) is an important determinant of German FDI outflows to developing countries - a factor that has been overlooked in the past, and (iii) industrial countries can substantially encourage their companies to invest in developing countries by offering public garantees. The case of Germany has shown that the actual costs involved are very low, as defaults are rare. Thus once it is decided that public support should be used to direct more FDI to developing countries, source countries'policies might be more effective than host countries'policies especially if the latter involve high foregone tax revenues.