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Policies to attract Foreign Direct Investment: An industry-level analysis

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Author Info
C. Bellac
M. Leibrecht
Robert Stehrer (wiiw)

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Abstract

This paper analyzes policies to attract Foreign Direct Investment (FDI) based on a sample comprising the US plus six EU countries (US-plus-EU-6) and four Central and Eastern European Countries (CEEC-4). The analysis draws on industry-level data for 1995-2003. A Dynamic Panel Data approach is used to isolate important country- and industry-level determinants of FDI inward stock. The estimated baseline model derived is used to assess the scope for FDI attraction policies. The scope for FDI is defined as the difference between the FDI inward stock received by a country-industry-pair, as implied by the baseline model ("estimated FDI"), and the inward FDI stock which could be realized if a certain "best practice" policy were carried out ("potential" FDI). The results show how different policy variables contribute to closing the gap between estimated and potential FDI. The countries in our sample fall into two groups: In the CEEC-4 an increase of R&D expenditures in GDP would result in a substantial increase in FDI, while in the US-plus-EU-6 an improvement of their unit labor cost position, e.g. via increases in labor productivity, and improvements in their tax position would attract additional FDI.

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Paper provided by FIW in its series FIW Research Reports series with number 19.

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Handle: RePEc:wsr:ecbook:2008:i:19

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Related research
Keywords: Economic Policy; Foreign Direct Investment; European Union; Industry-level Study; Location Decision;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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