Does Investment Promotion Work?

The large empirical literature on the relationship between Foreign Direct Investment (FDI) and economic growth has produced mixed results. Despite the ambiguous evidence on the benefits of FDI, investment promotion has become an active area of policy and a growing number of nations are offering services and incentives to attract investment by multinational firms. Rather than assessing whether the costs of investment promotion are justified by the potential benefits of FDI, this paper asks a prior question which is relevant to the policy debate. We investigate whether national investment promotion activities succeed in increasing the volume of inward investment or whether this expenditure merely subsidises investments which would have occurred in its absence. We use a widespread but under acknowledged feature of investment promotion practice to test the effectiveness of investment promotion at the industry level. We find that a positive effect of investment promotion on FDI inflows is robust across various empirical specifications.