Incentives, Agglomeration, and the Location of Greenfield Foreign Investment

This study examines the location of manufacturing foreign direct investment (FDI) in the United States, focusing on taxes and incentives relative to agglomeration as determinants. Using a panel Poisson regression with random effects, we model the probability of site selection in U.S. states and counties. The results reveal that localization and urban agglomeration economies clearly exert the most influence on FDI location. The localization estimate, as captured by the number of domestic manufacturing establishments, has an elasticity of 0.92. Urbanization economies, measured by the area’s wage premium, have an elasticity of 1.31. Among taxes and incentives, the investment tax credit (as a share of value added) is statistically significant, with an elasticity of 1.56. Further analysis reveals that this incentive is only significant in counties that rank in the highest quartile of existing manufacturing agglomeration. In areas falling in the lowest quartile of agglomeration, our estimates indicate that job training subsidies may attract FDI location. The property tax, the job creation tax credit, and research and development tax credit have no measurable effect on the location decisions of foreign manufacturers. In addition, the distance from the foreign-owned plant to a major airport, often overlooked as a determinant in location studies, appears to be attractive