Competition for FDI and the demand for information - are signalling strategies useful tools for developing countries?

In an environment of intense global competition the importance of information in the process of location choice increases sharply. This is due to location cost differences - that either stem from local regulation or natural location factors - which may contribute in a decisive manner to total costs of production. Particularly such investors who consider locations in developing countries need authentic and credible information about a site's productivity. Trying to influence an investor's location choice, developing countries use instruments of location marketing including fiscal incentive policies. These activities aim not only to draw investor's attention to the mere existence of a region but may even contain credible information about the productivity of the respective location factors. This paper attempts a comparison between means of marketing policy on product markets and instruments of business location marketing, which current research up to now failed to attempt. We present a study of analogies and illustrate it by using the figure of a location market on which location-seeking mobile factors and location-offering jurisdictions exchange services to the benefit of both. From the observation that location demanders cannot achieve complete knowledge about the quality of the location we deduce the existence of information asymmetries to the location demanders’ disadvantage. We point out the exceptional usefulness of signalling strategies for developing country locations in this context. A simple model serves as an answer to the question in how far introductory offers such as upfront subsidies or tax holidays, advertisement and the instrument of lighthouse policy, having acquired some fame in Eastern Germany after the fall of the iron curtain, are suited to alleviate the location demanders' informational disadvantages and to allow the risk connected with deciding for a location to become more calculable.