Media Briefings

Investment Promotion Agencies: An Effective Industrial Policy For Attracting Foreign Capital

  • Published Date: December 2011

Investment promotion agencies (IPAs) are a cost-effective way of increasing inflows of foreign direct investment (FDI) for developing countries, particularly those where information about business conditions is less readily available and bureaucratic procedures tend to be more burdensome.

That is the central conclusion of research by Dr Torfinn Harding and Professor Beata Javorcik, published in the December 2011 issue of the Economic Journal. Their results are good news for investment promotion professionals and the countries involved.

Analysing data on flows of US FDI into 124 countries, the study finds that:

  • Investment promotion increases FDI inflows into priority sectors in developing countries by 155%. Thus $1 spent on investment promotion increases FDI inflows by $189. An additional job created by a foreign affiliate requires $78 in investment promotion spending.
  • Investment incentives, an aspect of investment promotion that typically receives high levels of attention, do not appear to lead to additional FDI inflows.

Investment promotion is a new phenomenon. While only a handful IPAs existed 20 years ago, currently several hundred agencies are now operating at the national and sub-national level. These agencies have been set up in response to increasing competition for FDI and in the spirit of renewed interest in industrial policy.

The main purpose of investment promotion is to reduce the costs of FDI by providing information on business conditions and opportunities in the host economy and by helping foreign investors cut through bureaucratic procedures.

Investment promotion activities encompass advertising, participation in trade shows, direct marketing efforts, facilitating visits of prospective investors, matching prospective investors with local partners and helping obtain permits and approvals.

The results of this study suggest that investment promotion matters. Of course, it is not enough to set up an agency and expect a boom in FDI flows. But a well-run agency with professional staff and quality service can make a difference.

Investment promotion can be classified as a soft industrial policy, something that is increasingly uncontroversial in development circles. Providing information and creating a one-stop shop that minimises the bureaucratic burden imposed on foreign investor is relatively inexpensive. Public funding for such activities can be justified by the presence of knowledge externalities associated with FDI, identified in recent empirical research.

ENDS

Notes for editors: 'Roll out the Red Carpet and They Will Come: Investment Promotion, Information Asymmetries and FDI Inflows' by Torfinn Harding and Beata Javorcik is published in the December 2011 issue of the Economic Journal.

The authors are at the University of Oxford.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com); or Beata Javorcik +44-1865-271065 (email: beata.javorcik@economics.ox.ac.uk).