: Stephan Dreyhaupt
: Locational Tournaments in the Context of the EU Competitive Environment A New Institutional Economics Approach to Foreign Direct Investment Policy Competition between Governments in Europe
: DUV Deutscher Universitäts-Verlag
: 9783835091092
: 1
: CHF 49.70
:
: Volkswirtschaft
: English
: 305
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Based on the practical insights and experience gained in his professional work on foreign direct investment (FDI) in developing countries at the World Bank, and using the EU's competition framework as an example, Stephan J. Dreyhaupt analyses whether or not a multilateral system of investment rules can be economically and politically effective.

Dr. Stephan J. Dreyhaupt promovierte bei Prof. Dr. Rolf Caspers am Lehrstuhl für Weltwirtschaft und Internationales Management der European Business School, Schloß Reichartshausen in Oestrich-Winkel. Er ist als Head, Investment Information Services für MIGA, The World Bank Group, tätig.
I Introduction (p. 1)

1 Context of the Research

The last decade has witnessed a dramatic change in attitude towards foreign direct investment (FDI) and significantly increased competition between governments to attract FDI as a result. Globalization, and especially the removal of national barriers to capital flows, has lead to a tremendous surge in foreign direct investment which reached a record high of almost US$1.3 trillion in 2000 — representing a growth rate of 18 percent, which is higher than those of any other global economic indicators including world production, trade or capital formation.

This development has had a significant impact not only on economic processes but also on government policies aimed at attracting FDI. While still only a few Western countries would acknowledge investment promotion as an economic policy goal per se, all of them have set up specific policies and institutions that are aimed at attracting and regulating investment flows.

The latter is easy to understand given that the overall distribution of FDI remains highly skewed — only 30 host countries in total account for about 95 percent of all FDI inflows, and less than 30 home countries account for 99 percent of all outward investment flows in 2002 — and competition is fierce.

Main actors in this Vocational competition" are the nation states which drive competition for mobile investment among host locations (more or less active depending on their respective attitudes towards investment promotion) through a mix of FDI policies aimed at creating a favorable investment climate, reducing the costs to the investors through tax incentives, grants or other mechanisms, and developing promotional activities in the areas of information dissemination, image building and investor servicing.

The same measures have also been mirrored on a subnational level, in particular in the area of incentives, which have become a major policy instrument for regional and local governments. Since governments compete with each others institutional arrangements, this process has been termed institutional competition or FDI policy competition.

FDI policy competition can have both positive and negative outcomes. To its proponents, competition between jurisdictions for mobile investment is assumed to be efficiency-enhancing, as it ensures market-oriented taxation of the investment and prevents excessive government expenditures and wasteful rentseeking, thus"taming the Leviathan".

To its detractors, the inherent Prisoners Dilemma nature of the game forces countries into bidding wars that result in suboptimal provision of public services, ,induces market distortions (e.g., when subsidizing international firms at the expense of local enterprises), and puts downward pressure on environmental and labor standards. In their view, competition without rules is a negative-sum game both from a global as well as a national perspective.

Anecdotal evidence of national and regional bidding wars as a result of"locational tournaments" is abundant and striking:

• At the height of the"fiscal war" among states in Brazil to attract investment in the automotive sector, in 1996, Minas Gerais incurred a direct cost of about US$340,000 per job created, 92 percent of which were fiscal incentives (e.g., tax exemptions).
Foreword8
Acknowledgements10
Table of Contents14
Summary of Figures18
Summary of Tables19
Abbreviations20
I Introduction21
1 Context of the Research21
2 Objective and Structure of the Study27
2.1 Definitions and Conceptual Themes27
2.2 Research Objectives and Design29
II Theoretical Framework 35
1 Introduction35
2 Theories of Foreign Direct Investment37
2.1 Definition of Foreign Direct Investment37
2.2 Origins of Foreign Direct Investment Theory40
2.3 The Elusive40
2.3 The Elusive40
4240
2.4 The40
2.4 The40
5740
3 Locational Competition and Government Intervention64
3.1 The (Neo-) Classical Approach to Locational Competition64
3.2 The Neoclassical Model Revisited66
3.3 An Expanded Model of FDI Policy Competition between Governments70
4 The New Institutional Economics Theory80
4.1 Main Characteristics of the New Institutional Economics81
4.2 The Economics of Institutions84
4.3 New Institutional Economics Analysis of Foreign Direct Investment95
Ill Governance of Foreign Direct Investment Policy Competition in Europe109
1 European FDI Competition in Perspective111
1.1 Foreign Direct Investment in Europe111
1.2 EU Integration and the Context of Global FDI Competition117
2 The Institutional Environment for Policy Competition in Europe122
2.1 Competition between National Governments122
2.2 The Role of the European Commission127
2.3 Policy Instruments for FDI Competition in Europe131
3 Governance Models for Investment Promotion in Europe140
3.1 Objective and Institutions140
3.2 The Principal-Agent Relationship in Investment Promotion141
3.3 Different Institutional Approaches to Foreign Direct Investment Promotion143
IV Harnessing the Power of FDI Competition: An EU Policy Agenda158
1 Evaluating the Overall Effectiveness of FDI Competition159
1.2 Negative-Sum Game Hypothesis162
1.3 Are Countries Better Off Competing?164
2 Reviewing the EU Approach to Regulating FDI Policy Competition172
2.1 Impact of European Commission Policies on FDI Competition172
2.2 Main Weaknesses in the Current EU Approach to Practice177
3 Regional Integration and FDI Competition184
3.1 The Challenges of EU Enlargement184
3.2 System Competition versus Forced Harmonization188
3.3 Empirical Impressions: The Impact of FDI Policy Harmonization in the EU195
4 Institutional Issues and Policy Implications207
4.1 Reforming the Existing Framework of FDI Competition207
4.2 Maintaining Global Competitiveness214
V Political Economy Aspects of FDI Policy Competition220
1 International Regime Theory and Foreign Direct Investment222
1.1 Is FDI Policy Competition a Regime Issue?222
1.2 Diverging Views on International Regime Theory225
2 Institutional Choice and Cooperation in FDI Competition232
2.1 Increasing Transparency in Locational Competition232
2.2 Reaching Cooperative Investment Agreements234
2.3 Binding Multilateral Rules for Investment243
3 Is the EU Competition Framework a Model for International FDI Regimes?255
3.1 Rules of the FDI Game — How Should They Be Established?255
3.2 Rules of the FDI Game — How Should They Be Governed?261
3.3 Lessons Learned from the EU Experience267
VI Conclusions271
Annex275
Bibliography303