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Developing economies and international investors : do investment promotion agencies bring them together ?

  • Harding, Torfinn
  • Javorcik, Beata Smarzynska

Many countries spend significant resources on investment promotion agencies in the hope of attracting inflows of foreign direct investment. Despite the importance of this question for public policy choices, little is known about the effectiveness of investment promotion efforts. This study uses newly collected data on national investment promotion agencies in 109 countries to examine the effects of investment promotion on foreign direct investment inflows. The empirical analysis follows two approaches. First, it tests whether sectors explicitly targeted by investment promotion agencies receive more foreign direct investment in the post-targeting period relative to the pre-targeting period and non-targeted sectors. Second, it examines whether the existence of an investment promotion agency is correlated with higher foreign direct investment inflows. Results fromboth approaches point to the same conclusion. Investment promotion efforts appear to increase foreign direct investment inflows to developing countries. Moreover, agency characteristics, such as the agency's legal status and reporting structure, affect the effectiveness of investment promotion. There is also evidence of diversion of foreign direct investment due to investment incentives offered by other countries in the same geographic region.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4339.

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Date of creation: 01 Aug 2007
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Handle: RePEc:wbk:wbrwps:4339
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  1. Jacques Morisset & Kelly Andrews-Johnson, 2004. "The Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment," World Bank Publications, The World Bank, number 15073, December.
  2. Barry Eichengreen & Hui Tong, 2005. "Is China's FDI Coming at the Expense of Other Countries?," NBER Working Papers 11335, National Bureau of Economic Research, Inc.
  3. Andrew Charlton, 2003. "Incentive Bidding for Mobile Investment: Economic Consequences and Potential Responses," OECD Development Centre Working Papers 203, OECD Publishing.
  4. Robert E. Lipsey, 2007. "Defining and Measuring the Location of FDI Output," NBER Working Papers 12996, National Bureau of Economic Research, Inc.
  5. Lederman, Daniel & Olarreaga, Marcelo & Payton, Lucy, 2006. "Export Promotion Agencies: What Works and What Doesn't," CEPR Discussion Papers 5810, C.E.P.R. Discussion Papers.
  6. Holger Görg & David Greenaway, 2004. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Bank Research Observer, World Bank Group, vol. 19(2), pages 171-197.
  7. 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.
  8. Görg, Holger & Henry, Michael & Strobl, Eric, 2007. "Grant Support and Exporting Activity," CEPR Discussion Papers 6054, C.E.P.R. Discussion Papers.
  9. Cletus C. Coughlin & Eran Segev, 2000. "Location Determinants of New Foreign-Owned Manufacturing Plants," Journal of Regional Science, Wiley Blackwell, vol. 40(2), pages 323-351.
  10. 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.
  11. Blalock, Garrick & Gertler, Paul J., 2008. "Welfare gains from Foreign Direct Investment through technology transfer to local suppliers," Journal of International Economics, Elsevier, vol. 74(2), pages 402-421, March.
  12. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  13. Smarzynska, Beata K., 2002. "The composition of foreign direct investment and protection of intellectual property rights : evidence from transition economies," Policy Research Working Paper Series 2786, The World Bank.
  14. Bruce A. Blonigen & Miao Wang, 2004. "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," Working Papers and Research 0903, Marquette University, Center for Global and Economic Studies and Department of Economics.
  15. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
  16. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
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