IDEAS home Printed from https://ideas.repec.org/a/eee/deveco/v180y2026ics0304387825002172.html

The impact of investment promotion on multinational production: Firm-level evidence

Author

Listed:
  • Carballo, Jerónimo
  • de Artiñano, Ignacio Marra
  • Volpe Martincus, Christian

Abstract

Countries make use of a wide range of policies to attract multinational firms, but identifying their effects is challenging. In this paper, we provide novel microeconometric evidence on the impacts of one of the most common of such policies: investment promotion. To do so, we combine firm-level data on both the location of multinational firms’ foreign affiliates and detailed service-specific information from Costa Rica’s investment promotion agency (IPA) over time. We find that IPA support significantly increases the probability that a multinational firm establishes its first affiliate in the country. We then show that this effect is particularly strong for information services and on multinational firms from home countries and in sectors potentially facing more severe information frictions.

Suggested Citation

  • Carballo, Jerónimo & de Artiñano, Ignacio Marra & Volpe Martincus, Christian, 2026. "The impact of investment promotion on multinational production: Firm-level evidence," Journal of Development Economics, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:deveco:v:180:y:2026:i:c:s0304387825002172
    DOI: 10.1016/j.jdeveco.2025.103666
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304387825002172
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jdeveco.2025.103666?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Kugler, Maurice, 2006. "Spillovers from foreign direct investment: Within or between industries?," Journal of Development Economics, Elsevier, vol. 80(2), pages 444-477, August.
    2. Maggie Xiaoyang Chen, 2011. "Interdependence in multinational production networks," Canadian Journal of Economics, Canadian Economics Association, vol. 44(3), pages 930-956, August.
    3. Mayda, Anna-Maria & Parsons, Christopher & Pham, Han & Vézina, Pierre-Louis, 2022. "Refugees and foreign direct investment: Quasi-experimental evidence from US resettlements," Journal of Development Economics, Elsevier, vol. 156(C).
    4. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Firms in the European Union," Post-Print hal-01020551, HAL.
    5. Alonso Alfaro-Ureña & Isabela Manelici & Jose P Vasquez, 2022. "The Effects of Joining Multinational Supply Chains: New Evidence from Firm-to-Firm Linkages," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(3), pages 1495-1552.
    6. Jean Imbs & Isabelle Mejean, 2015. "Elasticity Optimism," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 43-83, July.
    7. Alviarez, Vanessa, 2019. "Multinational production and comparative advantage," Journal of International Economics, Elsevier, vol. 119(C), pages 1-54.
    8. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 569-600.
    9. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
    10. Alonso Alfaro-Urena & Benjamin Faber & Cecile Gaubert & Isabela Manelici & Jose P. Vasquez, 2022. "Responsible Sourcing? Theory and Evidence from Costa Rica," CESifo Working Paper Series 10108, CESifo.
    11. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Firms in the European Union," Post-Print hal-01020551, HAL.
    12. Cadot, Olivier & Fernandes, Ana M. & Gourdon, Julien & Mattoo, Aaditya, 2015. "Are the benefits of export support durable? Evidence from Tunisia," Journal of International Economics, Elsevier, vol. 97(2), pages 310-324.
    13. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Margins of Multinational Production and the Role of Intrafirm Trade," Journal of Political Economy, University of Chicago Press, vol. 121(1), pages 74-126.
    14. Kazunobu Hayakawa & Hyun-Hoon Lee & Donghyun Park, 2014. "Are Investment Promotion Agencies Effective in Promoting Outward Foreign Direct Investment? The Cases of Japan and Korea," Asian Economic Journal, East Asian Economic Association, vol. 28(2), pages 111-138, June.
    15. Javorcik, Beata S. & Spatareanu, Mariana, 2011. "Does it matter where you come from? Vertical spillovers from foreign direct investment and the origin of investors," Journal of Development Economics, Elsevier, vol. 96(1), pages 126-138, September.
    16. Pol Antràs & Mihir A. Desai & C. Fritz Foley, 2009. "Multinational Firms, FDI Flows, and Imperfect Capital Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 1171-1219.
    17. Alfaro, Laura & Chen, Maggie Xiaoyang, 2014. "The global agglomeration of multinational firms," Journal of International Economics, Elsevier, vol. 94(2), pages 263-276.
    18. Johannes Van Biesebroeck & Jozef Konings & Christian Volpe Martincus, 2016. "Did export promotion help firms weather the crisis?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(88), pages 653-702.
    19. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
    20. Hausmann, Ricardo & Hidalgo, Cesar, 2014. "The Atlas of Economic Complexity: Mapping Paths to Prosperity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262525429, December.
    21. Beata Javorcik & Steven Poelhekke, 2017. "Former Foreign Affiliates: Cast Out and Outperformed?," Journal of the European Economic Association, European Economic Association, vol. 15(3), pages 501-539.
    22. Keith Head & Thierry Mayer, 2019. "Brands in Motion: How Frictions Shape Multinational Production," American Economic Review, American Economic Association, vol. 109(9), pages 3073-3124, September.
    23. Laura Alfaro & Andrew Charlton, 2009. "Intra-industry Foreign Direct Investment," American Economic Review, American Economic Association, vol. 99(5), pages 2096-2119, December.
    24. Gustavo J. Bobonis & Howard J. Shatz, 2007. "Agglomeration, Adjustment, and State Policies in the Location of Foreign Direct Investment in the United States," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 30-43, February.
    25. Volpe Martincus, Christian & Carballo, Jerónimo, 2008. "Is export promotion effective in developing countries? Firm-level evidence on the intensive and the extensive margins of exports," Journal of International Economics, Elsevier, vol. 76(1), pages 89-106, September.
    26. Egger, Peter & Fahn, Matthias & Merlo, Valeria & Wamser, Georg, 2014. "On the genesis of multinational foreign affiliate networks," European Economic Review, Elsevier, vol. 65(C), pages 136-163.
    27. Treb Allen, 2014. "Information Frictions in Trade," Econometrica, Econometric Society, vol. 82, pages 2041-2083, November.
    28. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    29. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, November.
    30. repec:hal:pseose:hal-01301577 is not listed on IDEAS
    31. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2015. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 333-359.
    32. Wolfgang Keller & Stephen Ross Yeaple, 2013. "The Gravity of Knowledge," American Economic Review, American Economic Association, vol. 103(4), pages 1414-1444, June.
    33. Carballo, Jerónimo & Marra de Artiñano, Ignacio & Volpe Martincus, Christian, 2020. "Multinational Production and "Soft" Industrial Policies," IDB Publications (Working Papers) 10118, Inter-American Development Bank.
    34. Ramondo, Natalia, 2014. "A quantitative approach to multinational production," Journal of International Economics, Elsevier, vol. 93(1), pages 108-122.
    35. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
    36. Parente, Paulo M.D.C. & Santos Silva, J.M.C., 2012. "A cautionary note on tests of overidentifying restrictions," Economics Letters, Elsevier, vol. 115(2), pages 314-317.
    37. Sun, Liyang & Abraham, Sarah, 2021. "Estimating dynamic treatment effects in event studies with heterogeneous treatment effects," Journal of Econometrics, Elsevier, vol. 225(2), pages 175-199.
    38. Crescenzi, Riccardo & Di Cataldo, Marco & Giua, Mara, 2021. "FDI inflows in Europe: Does investment promotion work?," Journal of International Economics, Elsevier, vol. 132(C).
    39. Laura Alfaro & Maggie Xiaoyang Chen, 2018. "Transportation cost and the geography of foreign investment," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 12, pages 369-406, Edward Elgar Publishing.
    40. repec:spo:wpecon:info:hdl:2441/10192 is not listed on IDEAS
    41. Torfinn Harding & Beata S. Javorcik, 2011. "Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows," Economic Journal, Royal Economic Society, vol. 121(557), pages 1445-1476, December.
    42. James R. Markusen & Keith E. Maskus, 2002. "Discriminating Among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
    43. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
    44. Bin Ni & Yasuyuki Todo & Tomohiko Inui, 2017. "How Effective are Investment Promotion Agencies? Evidence from China," The Japanese Economic Review, Springer, vol. 68(2), pages 232-243, June.
    45. Abebe, Girum & McMillan, Margaret & Serafinelli, Michel, 2022. "Foreign direct investment and knowledge diffusion in poor locations," Journal of Development Economics, Elsevier, vol. 158(C).
    46. Volpe Martincus, Christian & Carballo, Jerónimo, 2010. "Beyond the average effects: The distributional impacts of export promotion programs in developing countries," Journal of Development Economics, Elsevier, vol. 92(2), pages 201-214, July.
    47. Chen, Maggie Xiaoyang & Moore, Michael O., 2010. "Location decision of heterogeneous multinational firms," Journal of International Economics, Elsevier, vol. 80(2), pages 188-199, March.
    48. repec:spo:wpmain:info:hdl:2441/mlkvtnbqe9pg8nsvf612mcnbs is not listed on IDEAS
    49. Stefania Garetto & Lindsay Oldenski & Natalia Ramondo, 2019. "Multinational Expansion in Time and Space," Boston University - Department of Economics - Working Papers Series WP2019-08, Boston University - Department of Economics.
    50. Javorcik, Beata Smarzynska & Spatareanu, Mariana, 2008. "To share or not to share: Does local participation matter for spillovers from foreign direct investment?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 194-217, February.
    51. Head, C. Keith & Ries, John C. & Swenson, Deborah L., 1999. "Attracting foreign manufacturing: Investment promotion and agglomeration," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 197-218, March.
    52. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2019. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 2, pages 55-88, World Scientific Publishing Co. Pte. Ltd..
    53. Esteban Méndez & Diana Van Patten, 2022. "Multinationals, Monopsony, and Local Development: Evidence From the United Fruit Company," Econometrica, Econometric Society, vol. 90(6), pages 2685-2721, November.
    54. Anders Akerman & Edwin Leuven & Magne Mogstad, 2022. "Information Frictions, Internet, and the Relationship between Distance and Trade," American Economic Journal: Applied Economics, American Economic Association, vol. 14(1), pages 133-163, January.
    55. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2010. "Does foreign direct investment promote growth? Exploring the role of financial markets on linkages," Journal of Development Economics, Elsevier, vol. 91(2), pages 242-256, March.
    56. Fernandes, Ana M. & Paunov, Caroline, 2012. "Foreign direct investment in services and manufacturing productivity: Evidence for Chile," Journal of Development Economics, Elsevier, vol. 97(2), pages 305-321.
    57. Keith Head & Thierry Mayer, 2019. "Brands in Motion: How Frictions Shape Multinational Production," American Economic Review, American Economic Association, vol. 109(9), pages 3073-3124, September.
    58. Esteban Méndez-Chacón & Diana Van Patten, 2022. "Multinationals, Monopsony, and Local Development: Evidence from the United Fruit Company," Documentos de Trabajo 2203, Banco Central de Costa Rica.
    59. Laura Alfaro & Andrew Charlton, 2007. "Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?," CEP Discussion Papers dp0830, Centre for Economic Performance, LSE.
    60. Pablo D Fajgelbaum & Pinelopi K Goldberg & Patrick J Kennedy & Amit K Khandelwal, 2020. "The Return to Protectionism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 1-55.
    61. Clémence Lenoir & Julien Martin & Isabelle Mejean, 2023. "Search Frictions in International Goods Markets," Journal of the European Economic Association, European Economic Association, vol. 21(1), pages 326-366.
    62. Peter H. Egger & Andrea Lassmann, 2015. "The Causal Impact of Common Native Language on International Trade: Evidence from a Spatial Regression Discontinuity Design," Economic Journal, Royal Economic Society, vol. 0(584), pages 699-745, May.
    63. Arnaud Costinot & Dave Donaldson & Ivana Komunjer, 2012. "What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 581-608.
    64. Antrà s, Pol & Yeaple, Stephen R., 2014. "Multinational Firms and the Structure of International Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 55-130, Elsevier.
    65. Jakob Munch & Georg Schaur, 2018. "The Effect of Export Promotion on Firm-Level Performance," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 357-387, February.
    66. Volpe Martincus, Christian & Carballo, Jerónimo, 2010. "Beyond the average effects: The distributional impacts of export promotion programs in developing countries," Journal of Development Economics, Elsevier, vol. 92(2), pages 201-214, July.
    67. Conconi, Paola & Sapir, André & Zanardi, Maurizio, 2016. "The internationalization process of firms: From exports to FDI," Journal of International Economics, Elsevier, vol. 99(C), pages 16-30.
    68. Natalia Ramondo & Andrés Rodríguez-Clare & Felix Tintelnot, 2015. "Multinational Production: Data and Stylized Facts," American Economic Review, American Economic Association, vol. 105(5), pages 530-536, May.
    69. Torfinn Harding & Beata S. Javorcik, 2012. "Foreign Direct Investment and Export Upgrading," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 964-980, November.
    70. Laura Alfaro & Maggie Xiaoyang Chen, 2012. "Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 30-55, August.
    71. Yeaple, Stephen Ross, 2009. "Firm heterogeneity and the structure of U.S. multinational activity," Journal of International Economics, Elsevier, vol. 78(2), pages 206-215, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jerónimo Carballo & Ignacio Marra de Artiñano & Christian Volpe Martincus, 2021. "Information Frictions, Investment Promotion, and Multinational Production: Firm-Level Evidence," CESifo Working Paper Series 9043, CESifo.
    2. Carballo, Jerónimo & Marra de Artiñano, Ignacio & Sztajerowska, Monika & Volpe Martincus, Christian, 2023. "How Do Investment Promotion Policies Affect Sustainability?," IDB Publications (Working Papers) 13306, Inter-American Development Bank.
    3. Chen, Maggie Xiaoyang & Lin, Chuanhao, 2020. "Geographic connectivity and cross-border investment: The Belts, Roads and Skies," Journal of Development Economics, Elsevier, vol. 146(C).
    4. Laura Alfaro & Maggie Xiaoyang Chen, 2018. "Transportation cost and the geography of foreign investment," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 12, pages 369-406, Edward Elgar Publishing.
    5. Laura Alfaro & Maggie X. Chen, 2016. "Location Fundamentals, Agglomeration Economies, and the Geography of Multinational Firms," Working Papers 2016-18, The George Washington University, Institute for International Economic Policy.
    6. Antrà s, Pol & Yeaple, Stephen R., 2014. "Multinational Firms and the Structure of International Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 55-130, Elsevier.
    7. (ed.), 0. "Research Handbook on Economic Diplomacy," Books, Edward Elgar Publishing, number 16053.
    8. Okubo, Toshihiro & Watabe, Yuta, 2023. "Networked FDI and third-country intra-firm trade," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 591-606.
    9. Helen Naughton & Pehr-Johan Norbäck & Ayça Tekin-Koru, 2016. "Aggregation Issues of Foreign Direct Investment Estimation in an Interdependent World," The World Economy, Wiley Blackwell, vol. 39(12), pages 2046-2073, December.
    10. Maria Borga & Perla Ibarlucea Flores & Monika Sztajerowska, 2020. "Drivers of divestment decisions of multinational enterprises - A cross-country firm-level perspective," OECD Working Papers on International Investment 2019/03, OECD Publishing.
    11. Laura Casi & Laura Resmini, 2014. "Spatial complexity and interactions in the FDI attractiveness of regions," Papers in Regional Science, Wiley Blackwell, vol. 93, pages 51-78, November.
    12. Pol Antràs & Davin Chor, 2021. "Global Value Chains," NBER Working Papers 28549, National Bureau of Economic Research, Inc.
    13. Alfaro, Laura & Chen, Maggie Xiaoyang, 2014. "The global agglomeration of multinational firms," Journal of International Economics, Elsevier, vol. 94(2), pages 263-276.
    14. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," PSE Working Papers halshs-03265057, HAL.
    15. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," Working Papers halshs-03265057, HAL.
    16. Li, Haishi, 2026. "Multinational production and global shock propagation during the great recession," Journal of Monetary Economics, Elsevier, vol. 157(C).
    17. Mayer, T. & Mejean, I. & Nefussi, B., 2010. "The location of domestic and foreign production affiliates by French multinational firms," Journal of Urban Economics, Elsevier, vol. 68(2), pages 115-128, September.
    18. Mitsuyo ANDO & Kazunobu HAYAKAWA & Fukunari KIMURA & Kenta YAMANOUCHI, 2025. "The Structure of Supply Chains and the Impacts of Trump 1.0 Tariffs: Evidence from Japanese firms’ sales to North America," Discussion papers 25046, Research Institute of Economy, Trade and Industry (RIETI).
    19. Marti, Josep & Alguacil, Maite & Orts, Vicente, 2015. "Firm Heterogeneity and Location Choice of European Multinationals," MPRA Paper 62596, University Library of Munich, Germany.
    20. Mayer, T. & Mejean, I. & Nefussi, B., 2010. "The location of domestic and foreign production affiliates by French multinational firms," Journal of Urban Economics, Elsevier, vol. 68(2), pages 115-128, September.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:180:y:2026:i:c:s0304387825002172. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/devec .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.