Short-Run Strategies for Attracting Foreign Direct Investment

30 Pages Posted: 14 Jul 2010

Abstract

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982–94 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third-country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Suggested Citation

Azémar, Céline and Desbordes, Rodolphe, Short-Run Strategies for Attracting Foreign Direct Investment. World Economy, Vol. 33, No. 7, pp. 928-957, July 2010, Available at SSRN: https://ssrn.com/abstract=1639638 or http://dx.doi.org/10.1111/j.1467-9701.2010.01226.x

Céline Azémar (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Rodolphe Desbordes

SKEMA Business School ( email )

Lille
France

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