Locational Tournaments in the Context of the EU Competitive Environment

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November 2007



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.


Theoretical framework

Governance of foreign direct investment (FDI) policy competition in Europe

Harnessing the power of FDI competition: an EU policy agenda

Political economy aspects of FDI policy competition


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 ha
ve 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).


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EAN: 9783835091092
Untertitel: A New Institutional Economics Approach to Foreign Direct Investment Policy Competition between Governments in Europe. 2006. Auflage. Sprache: Englisch. Dateigröße in MByte: 16.
Verlag: Deutscher Universitätsverlag
Erscheinungsdatum: November 2007
Seitenanzahl: xxi305
Format: pdf eBook
Kopierschutz: Adobe DRM
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