- Beata Javorcik, Oxford University
- Torfinn Harding, University of Oxford
Abstract: As information asymmetries between host countries and potential foreign investors constitute a significant obstacle to investment flows across international borders, an important policy question is: what can aspiring FDI destinations do to reduce such barriers? This study uses newly collected data on 124 countries to examine the effects of investment promotion on FDI inflows. We test whether sectors explicitly targeted by investment promotion agencies in their efforts to attract FDI receive more investment in the post-targeting period, relative to the pre-targeting period and nontargeted sectors. The results of our analysis are consistent with investment promotion leading to higher FDI flows to countries in which information asymmetries are likely to be severe. Investment promotion efforts appear to be reasonably cost effective. A dollar spent on investment promotion is found to increase FDI inflows by 189 dollars. An additional job created by a foreign affiliate requires 78 dollars in investment promotion spending.