Public Policies and FDI Location : Differences between Developing and Developed Countries

Host country government officials in developing and developed countries alike would like to know the impact of their public policies on foreign investment in their countries. Unfortunately, the literature does not provide a single view, and there are likely to be differences in the correct answer between developing and developed countries. This paper examines the impact of three host country government policies on the host’s FDI stock: taxation, good governance, and infrastructure. We focus on whether the impact of these factors on FDI differs depending on the level of development of the host country. The regression results indicate that FDI is sensitive to host country taxation in developed countries, but not in developing countries; FDI is sensitive to host country governance measures and corruption in both developing countries and developed, with a somewhat larger impact for developing countries; and FDI shows sensitivity to host country infrastructure quality in both developed and developing host countries. * Mailing Address: Hunter College, Department of Economics, 695 Park Avenue, NY, NY, 10021 USA ** Mailing Address: Georgia State University, Andrew Young School of Policy Studies, 14 Marietta Street, Suite 557, Atlanta, Georgia 30303-3083. *** Mailing address: Central University of Finance and Economics, China Academy of Public Finance and Public Policy, 39 South College Road, Haidian District, Beijing, 100081, China. We gratefully acknowledge the comments of participants in the 7 Bundesbank MiDi Workshop, October 6, 2009, the Oxford CBT 2010 Summer Symposium, the 2010 IIPF Meetings and particularly Serena Fatica, two referees, Alfons Weichenrieder; we also thank Partha Deb for useful discussions. All errors are our own. Goodspeed gratefully acknowledges support from PSC-CUNY grant # 63707-00 41.