Abstract
The issue of the effectiveness of open competition for foreign direct investment is generally overshadowed by the much larger question about the impact of FDI on economic growth and development. On the positive side, FDI has the potential to bring employment, capital, technology and knowledge to a country. It can also increase income, foreign exchange, and stimulate domestic investment. Moreover, so called spill-over effects can raise productivity of local firms, lower the cost of R&D and innovation, stimulate the establishment of local supplier networks, and generally facilitate an increased integration in global markets. On the negative side, FDI is associated with the risk of lowered domestic savings and investment, the crowding-out of local firms in capital markets, distorted competition, diminished regulatory standards, and the absence of expected spillover effects.
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References
See, for example, CARKOVIC/ LEVINE (2002); HANSON (2001); AITKEN/ HANSON/ HARRISON (1997).
These include, inter alia, stability of financial markets (ALFARO/ CHANDA/ KALEMLI-OZCAN/ SAYEK, 2001), quality of human capital (BORENSZTEIN/ DE GREGORIO/ LEE, 1998), technological advancement (DE MELLO, 1997), income levels (BLOMSTÖM/LIPSEY/ ZEJAN, 1994) and openness to trade (BALASUBRAMANYAM/ SALISU/ SAPSFORD, 1996).
See OECD (2002), p. 28.
SINN (1992), p. 177.
EDWARDS/ KEEN (1996), p. 115.
See also APOLTE (1999) for a critical examination of this argument.
See TIEBOUT (1956), p. 416. Although this theory was originally applied to mobility of households, it has now also been applied to competition among jurisdictions for mobile firms (see, for example, WHITE, 1975; FISCHEL, 1975; WELLISCH, 2000).
See SIEBERT (2000, 1996); LORZ (2003, 1997); SINN (1992).
See OMAN (2000), p. 17.
See OMAN (2000), pp. 17–18.
See WILSON (2001), pp. 13–14.
See OECD (2001), p. 9.
CHARLTON (2003), p. 13.
See, for example, OATES (1972); WILSON (1986); ZODROW/ MIESZKOWSKI (1986).
OATES (1972), p. 143.
See EDWARDS/ KEEN (1996), p. 115.
See OMAN (2000), p. 19.
See VOGEL (2001); WHEELER (2001).
The example of the so-called “California Effect” in the United States shows that the adoption of stricter environmental standards does not inevitably lead to the loss of competitive edge. Since 1970, after the passage of the U.S. Clean Air Act Amendment, California has been consistently adopting higher emissions standards than other U.S. states. However, this has not resulted in capital flight and company relocations, but instead other states have “traded-up” to California’s tougher standards (see VOGEL, 1995).
See OMAN (2000), p. 94.
See WILSON (1999), p. 269.
See OATES (1972); WILSON (1986); ZODROW/ MIESZKOWSKI (1986).
See JANEBA/ SCHJELDERUP (2002) for a recent review of the state of theory and academic debate on tax competition.
The model used here is based on the one by FERNÁNDES-ARIAS/ HAUSMANN/ STEIN (2001) with the critical extension that both country and firm-specific preferences matter.
EDWARDS/ KEEN (1996), p. 115.
See FERNÁNDES-ARIAS/ HAUSMANN/ STEIN (2001), p. 5.
See FERNÁNDES-ARIAS/ HAUSMANN/ STEIN (2001), pp. 7–8. It is only efficient if there is a sufficiently high number of investment projects with positive externalities that take place regardless of subsidies.
See FERNÁNDES-ARIAS/ HAUSMANN/ STEIN (2001), pp. 10–11.
FERNÁNDES-ARIAS/ HAUSMANN/ STEIN (2001), p. 10 use this term for a scenario where countries with the highest social rates of return do not have the highest private rates of return.
See FERNÁNDES-ARIAS/ HAUSMANN/ STEIN (2001), p. 11.
The reverse timing of the costs-benefit structure, i.e., immediate tangible benefits of investment attraction for governments, while most of the costs are only incurred in the future (e.g., in case of tax incentives), also makes incentive-bidding politically attractive (see KOKKO, 2002, p. 6).
See KASPER/ STREIT (1998), p. 67.
This is most likely to occur in circumstances where countries compete over non-specialized, identical locational conditions, for example, low cost facilities for resource-seeking FDI (see MORISSET/ PIRNIA, 2001).
CHARLTON/ CHRISTIANSEN/ OMAN (2002), p.11. “Winners curse” refers to the fact that countries would be better of without the investment.
When aggregating potential economic and political costs of FDI competition, its impact on the general welfare of host countries appears even more ambiguous. The notion that there is not just one efficient outcome, but varying sets of arrangements that could loosely be defined as efficient (GARRETT, 1992), comes to mind. The latter is particularly advocated in the realist tradition of regime theory in political sciences, which states that “The problem is not how to get to the Pareto frontier but which point along the frontier will be chosen.” (KRASNER, 1992, p. 340). A similar view is also favored in some NIE quarters, which argue that system competition entails both economic competition for mobile factors between jurisdictions as well as political competition for votes within the jurisdiction, and that the latter renders the idea of one efficient outcome based on (economic) system competition obsolete (see WOHLGEMUTH/ ADAMOVICH, 1999). The political economy of FDI competition, which is presented in Chapter 5, will follow-up on this line of argument in general, and the impact of distributional conflicts and power asymmetries in the process, in particular.
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(2006). Evaluating the Overall Effectiveness of FDI Competition. In: Locational Tournaments in the Context of the EU Competitive Environment. DUV. https://doi.org/10.1007/978-3-8350-9109-2_10
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