1. FDI Promotion:
Why and How?
Beata Smarzynska Javorcik
University of Oxford
beata.javorcik@economics.ox.ac.uk
2. Is FDI really good for growth?
“One dollar of FDI is worth no more (and no less) than a
dollar of any kind of investment” (D. Rodrik)
Yet, 59 out of 108 countries surveyed in the World Bank’s
census of investment promotion agencies offered FDI
incentives in 2004
3. Outline
1. Why should we expect FDI to stimulate growth in
host countries?
2. Evidence on knowledge transfer to FDI recipients
3. Effect of FDI on other firms within the industry
4. Effect of FDI on firms in the supplying industries
5. Is FDI promotion effective?
6. Does IPI quality matter?
4. Technology transfer through FDI =>
economic growth
MNCs are responsible for most of the world’s R&D
700 multinational corporations accounted for 46% of
the world’s total R&D expenditure and 69% of the
world’s business R&D in 2002 (UNCTAD 2005)
R&D budgets of large multinationals may exceed R&D
spending of some countries
5. R&D budgets of some MNCs exceed R&D
spending of transition countries (2003)
0
1000
2000
3000
4000
5000
6000
7000
8000
CIS new EU member
states
Ford Motor Pfizer DaimlerChrysler Siemens
millions
of
US
dollars
CIS figure includes: Russia, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Ukraine, Uzbekistan.
New EU member states figure includes: Czech Rep, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Rep, Slovenia.
6. Outline
1. Why should we expect FDI to stimulate growth in
host countries?
2. Evidence on knowledge transfer to FDI recipients
3. Effect of FDI on other firms within the industry
4. Effect of FDI on firms in the supplying industries
5. Is FDI promotion effective?
6. Does IPI quality matter?
7. Effect of FDI on recipient firms
Key question: Is the superior performance of foreign
affiliates due to some intrinsic advantage of foreign
ownership or are foreign investors simply good at
picking acquisition targets?
8. Arnold and Javorcik (2009)
Examine this question using plant-level information on
400 new FDI recipients in Indonesia (1983-2001)
Compare the differences in the paths of development
between FDI recipients and the control group
Control group: plants with similar observable
characteristics before a foreign acquisition, operating
in the same industry/year
1/n 1 to n[(ProductivityFDI recipient, post-FDI - ProductivityFDI recipient, pre-FDI)
- (Productivitycontrol, post-FDI - Productivitycontrol, pre-FDI)]
9. Foreign ownership improves performance
Total factor productivity (in logs)
Pre-acquisition
Year
Acquisition
year
One year
later
Two years
later
FDI recipients 0.864 1.079 1.142 1.215
Control group 0.867 0.976 1.022 1.083
Difference 0.106*** 0.122*** 0.135***
(0.034) (0.045) (0.051)
10. Foreign ownership improves performance
While best performers tend to receive FDI,
foreign ownership also leads to increased
productivity
FDI recipients exhibit a 13.5% higher
productivity growth by the end of the 3rd year
under foreign ownership
11. Foreign ownership improves performance
Labor productivity (in logs)
Pre-acquisition
Year
Acquisition
year
One year
later
Two years
later
FDI recipients 4.28 4.50 4.60 4.62
Control group 4.20 4.14 4.06 4.05
Difference 0.280*** 0.459*** 0.489***
(0.072) (0.074) (0.088)
15. Outline
1. Why should we expect FDI to stimulate growth in
host countries?
2. Evidence on knowledge transfer to FDI recipients
3. Effect of FDI on other firms within the industry
4. Effect of FDI on firms in the supplying industries
5. Is FDI promotion effective?
6. Does IPI quality matter?
16. FDI affects domestic firms through
multiple channels (Czech Rep.)
0
10
20
30
40
50
60
Increased
competition
Loss
of
market
share
Loss
of
employees
Worsened
access
to
credit
Information
about
new
technologies
Information
about
marketing
techniques
Hired
former
MNC
employees
%
of
respondents
17. Competitors and non-competitors
as sources of knowledge
From multinationals in the same sector which are
% of Czech firms reporting competitors non-competitors
learning about new technologies 26% 22%
learning about new marketing techniques 12% 11%
benefiting from knowledge of employees
trained by multinationals
5% 2%
18. Relative magnitudes of the effects
differ by country
29
24
15
0
10
20
30
40
50
60
Increased
competition
Loss
of
market
share
Loss
of
employees
Worsened
access
to
credit
Information
about
new
technologies
Information
about
marketing
techniques
Hired
former
MNC
employees
%
of
respondents
Czech Rep.
Latvia
19. Outline
1. Why should we expect FDI to stimulate growth in
host countries?
2. Evidence on knowledge transfer to FDI recipients
3. Effect of FDI on other firms within the industry
4. Effect of FDI on firms in the supplying industries
5. Is FDI promotion effective?
6. Does IPI quality matter?
20. Effect of FDI on firms in the
supplying industries
While MNCs have an incentive to prevent
leakage of knowledge to their competitors, they
may want to promote knowledge transfer to
local suppliers
FDI boosts productivity in the supplying
industries
Evidence from Lithuania (Javorcik 2004)
Evidence from Indonesia (Gertler and Blalock 2007)
21. MNCs’ requirements vis a vis potential
suppliers
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Improve
quality
assurance
Acquire ISO
9000
Improve
timeliness of
deliveries
Use new
technology
Purchase
new
equipment
Improve the
product
22. Assistance received by Czech firms
from MNCs
0% 5% 10% 15% 20% 25% 30% 35% 40%
Suppliers reporting a particular type of assistance
Any type of assistance
Personnel training
Advance payment
Leasing of machinery
Provision of inputs
Help with organizing production lines
Help with quality assurance
Assistance with technology
Help with finding export opportunities
Provision of patented technologies
Equipment repairs
23. MNC suppliers
Different from other firms: larger, with higher capital-
labor ratio, paying higher wages and more productive
High productivity firms are more likely to become
suppliers
Suppliers learn from their relationships with MNCs
Javorcik and Spatareanu (2009)
24. Outline
1. Why should we expect FDI to stimulate growth in
host countries?
2. Evidence on knowledge transfer to FDI recipients
3. Effect of FDI on other firms within the industry
4. Effect of FDI on firms in the supplying industries
5. Is FDI promotion effective?
6. Does IPI quality matter?
25. Why do investment promotion?
Knowledge externalities as justification for policy
intervention
Information asymmetries between host countries and
potential foreign investors are significant obstacles to
investment flows across international borders
What can aspiring FDI destinations do to reduce such
barriers?
Is investment promotion the answer?
26. Almost all countries are
engaged in FDI promotion
0
20
40
60
80
100
120
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
no.
of
IPAs
IPAs in developing countries
IPAs in developed countries
27. Harding and Javorcik (2011)
Conducted a Census of IPIs on behalf of the World Bank
Point of departure
Sector targeting considered best practice in investment promotion
Information on sector targeting
Standardized list of targeted sectors with dates when the policy was in place
Data on FDI from the U.S. by country, sector and year
(124 countries, 15 sectors, 1990-2004)
Did FDI inflows to targeted sectors increase during targeting?
(relative to non-targeted sectors)
28. Which sectors are targeted?
No. of countries targeting in 2004
0
5
10
15
20
25
30
35
40
45
50
Information
Other
industries
Food
Machinery
Electrical
equipment
Financial
institutions
ex.
Dep.
Inst.
Depository
institutions
Professional
and
sci.
serv.
Chemicals
and
allied
products
Primary
fabricated
metals
Petroleum
and
minerals
Transport
equipment
Utilities
Wholesale
trade
Developed countries
Developing countries
29. Estimation results
Investment promotion generates higher FDI flows to
developing countries and emerging markets:
Targeting increases FDI by 155%
Additional $17 mn dollars of FDI
Investment promotion is more effective in countries…
where information asymmetries are large
with burdensome bureaucratic procedures
30. IP: an inexpensive way of overcoming
information asymmetries
Crude back-of-the-envelope cost-benefit exercises:
Costs
$90,000 spent on average per sector targeted
Benefits
Additional $17 mn of FDI in typical sector
=> $1 spent on investment promotion => $189 of FDI
Additional 1,159 jobs in foreign affiliates
=> cost of $78 per job created
31. Outline
1. Why should we expect FDI to stimulate growth in
host countries?
2. Evidence on knowledge transfer to FDI recipients
3. Effect of FDI on other firms within the industry
4. Effect of FDI on firms in the supplying industries
5. Is FDI promotion effective?
6. Does IPI quality matter?
32. Measuring IPI quality
Global Investment Promotion Benchmarking (GIPB) assesses two
aspects of IPIs:
Web site quality:
content, architecture, design and promotional effectiveness
relevant, clear and credible information presented in an attractive
and user-friendly way
Mystery shopper:
handling of direct project inquiries from investor
competence and responsiveness of the agency’s staff
timeliness, quality and credibility of informational content
33. Quality of IPIs varies widely
across countries
0
20
40
60
80
100
120
90% or
above
80-89% 70-79% 60-69% 50-59% 40-49% 30-39% 20-29% 1-19% 0%
Web site Inquiry handling
35. Unconditional scatter plot:
ln FDI flows and IPI quality
AGO
ALB
ARG
ARM
ATG
AUS
AUT
AZE
BDI
BEN
BFA
BGD
BGR
BHR
BHS
BIH
BLR
BLZ
BOL
BRA
BRB
BRN
BTN
BWA
CAN
CHE
CHL
CHN
CMR
COG
COL
CPV
CRI
CYP
CZE
DEU
DJI
DMA
DNK
DOM
DZA
ECU
EGY
ERI
ESP
EST
ETH
FIN
FJI
FRA
GAB
GBR
GEO
GHA
GIN
GMB
GNB
GRC
GRD
GTM
GUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
IRQ
ISL
ISR
ITA
JAM
JOR
JPN
KAZ
KEN
KGZ
KHM
KNA
KOR
KSV
KWT
LAO
LBN
LBR
LBY
LCA
LKA
LSO
LTU
LUX
LVA
MAR
MDA
MDG
MDV
MEX
MKD
MLI
MNE
MNG
MOZ
MUS
MWI
MYS
NAM
NER
NGA
NIC
NLD
NPL
NZL
OMN
PAK
PAN
PER
PHL
PNG
POL
PRT
PRY
ROM
RUS
RWA
SAU
SDN
SEN
SGP
SLB
SLE
SLV
SRB
SVK
SVN
SWE
SWZ
SYC
SYR
TGO
THA
TJK
TON
TTO
TUN
TUR
TZA UGA
UKR
URY
USA
VCT
VEN
VNM
VUT
WBG
WSM
YEM
ZAF
ZMB
15
20
25
0 20 40 60 80
IPI quality
All countries
FDI inflow and IPI quality
36. Unconditional scatter plot:
ln FDI flows and Inquiry handling
quality
AGO
ALB
ARG
ARM
ATG
AUS
AUT
AZE
BDI
BEN
BFA
BGD
BGR
BHR
BHS
BIH
BLR
BLZ
BOL
BRA
BRB
BRN
BTN
BWA
CAN
CHE
CHL
CHN
CMR
COG
COL
CPV
CRI
CYP
CZE
DEU
DJI
DMA
DNK
DOM
DZA
ECU
EGY
ERI
ESP
EST
ETH
FIN
FJI
FRA
GAB
GBR
GEO GHA
GIN
GMB
GNB
GRC
GRD
GTM
GUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
IRQ
ISL
ISR
ITA
JAM
JOR
JPN
KAZ
KEN
KGZ
KHM
KNA
KOR
KSV
KWT
LAO
LBN
LBR
LBY
LCA
LKA
LSO
LTU
LUX
LVA
MAR
MDA
MDG
MDV
MEX
MKD
MLI
MNE
MNG
MOZ
MUS
MWI
MYS
NAM
NER
NGA
NIC
NLD
NPL
NZL
OMN
PAK
PAN
PER
PHL
PNG
POL
PRT
PRY
ROM
RUS
RWA
SAU
SDN
SEN
SGP
SLB
SLE
SLV
SRB
SVK
SVN
SWE
SWZ
SYC
SYR
TGO
THA
TJK
TON
TTO
TUN
TUR
TZA UGA
UKR
URY
USA
VCT
VEN
VNM
VUT
WBG
WSM
YEM
ZAF
ZMB
15
20
25
FDI
inflow
(in
logs)
0 20 40 60 80
Inquiry handling quality
All countries
FDI inflow and Inquiry handling quality
37. Unconditional scatter plot:
ln FDI flows and Website quality
AGO
ALB
ARG
ARM
ATG
AUS
AUT
AZE
BDI
BEN
BFA
BGD
BGR
BHR
BHS
BIH
BLR
BLZ
BOL
BRA
BRB
BRN
BTN
BWA
CAN
CHE
CHL
CHN
CMR
COG
COL
CPV
CRI
CYP
CZE
DEU
DJI
DMA
DNK
DOM
DZA
ECU
EGY
ERI
ESP
EST
ETH
FIN
FJI
FRA
GAB
GBR
GEO
GHA
GIN
GMB
GNB
GRC
GRD
GTM
GUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
IRQ
ISL
ISR
ITA
JAM
JOR
JPN
KAZ
KEN
KGZ
KHM
KNA
KOR
KSV
KWT
LAO
LBN
LBR
LBY
LCA
LKA
LSO
LTU
LUX
LVA
MAR
MDA
MDG
MDV
MEX
MKD
MLI
MNE
MNG
MOZ
MUS
MWI
MYS
NAM
NER
NGA
NIC
NLD
NPL
NZL
OMN
PAK
PAN
PER
PHL
PNG
POL
PRT
PRY
ROM
RUS
RWA
SAU
SDN
SEN
SGP
SLB
SLE
SLV
SRB
SVK
SVN
SWE
SWZ
SYC
SYR
TGO
THA
TJK
TON
TTO
TUN
TUR
TZAUGA
UKR
URY
USA
VCT
VEN
VNM
VUT
WBG
WSM
YEM
ZAF
ZMB
15
20
25
FDI
inflow
(in
logs)
0 20 40 60 80 100
Website quality
All countries
FDI inflow and Website quality
38. Does IPI quality matter?
Empirical approach
Cross section analysis, 156 countries:
Average IPI quality (GIPB06, GIPB09 and GIPB12)
Average FDI inflows from all countries 2000-10 (IFS)
Controlling for:
GDP per capita
GDP growth
Population size
Inflation
Political stability in host country
39. Findings
A one unit increase in the GIPB score
associated with a 1.5% increase in FDI
inflows
Going from Sub-Saharan Africa to Latin
America in GIPB performance => 35-40%
more FDI
(Harding and Javorcik 2013)
40. Results are robust to…
1. Focusing on developing countries only
2. Controlling for various aspects of the
business climate
3. Using sector-specific information
4. Instrumenting for the quality of IPIs
41. Policy conclusions
Evidence on knowledge externalities associated with FDI provides
justification for public support of IPIs
Successful investment promotion requires
Professionalism, competence, effort and commitment to customer
service
Up-to-date, attractive and user-friendly web site
Providing relevant and useful information in the site selection
process makes a difference
The GIPB initiative and results: valuable guiding-tool for IPIs
The GIPB criteria specify what high quality of inquiry handling and Web
sites mean
Its assessment process can provides useful feedback on areas in need
of improvement
43. References
Arnold, Jens and Beata S. Javorcik (2009). Gifted Kids or Pushy Parents? Foreign Acquisitions and Firm
Performance in Indonesia. Journal of International Economics 79(1)
Blalock, Garrick and Paul J. Gertler (2008). “Welfare Gains from Foreign Direct Investment through
Technology Transfer to Local Suppliers” Journal of International Economics 74(2): 402-421
Harding, Torfinn and Beata Javorcik (2011). “Roll out the Red Carpet and They Will Come: Investment
Promotion and FDI Inflows” Economic Journal 121(557)
Harding, Torfinn and Beata Javorcik (2013). “Investment Promotion and FDI Inflows: Quality Matters”
CESifo Economic Studies forthcoming
Javorcik, Beata (2004). Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In
Search of Spillovers through Backward Linkages. American Economic Review 94(3): 605-627
Javorcik, Beata and Mariana Spatareanu (2009)."Tough Love: Do Czech Suppliers Learn from Their
Relationships with Multinationals?“ Scandinavian Journal of Economics 111(4)
UNCTAD (2005). World Investment Report: Transnational Corporations and the Internalization of R&D. New
York and Geneva: United Nations
