Home country measures for FDI: an analysis at regional level

Abstract

The promotion of outward investment through a number of home country measures has become prominent in recent years (hereafter HCMs) (UNCTAD, 2001). Scope and justification for public intervention are motivated by two reasons. First, HCMs can correct for market and coordination failures and, second, they are good for home country development (UNCTAD, 2001). In particular, governments may provide policy measures in the attempt to encourage investment activity and hence induce business growth and competitiveness and reduce regional disparities (Atzeni and Carboni, 2008; Craig et al., 2008; Skuras and Tzelepis, 2004; Haapanen et al., 2005). Nevertheless, public intervention can limit competition and give rise to market inefficiencies (Wollman, 2007). Moreover, when public incentives substitute for resources that can be traded on markets and support projects that would take place in any case, they generate a net transfer of resources from taxpayers to granted firms (the so-called deadweight effect; see Marglin, 1963). Although many empirical analyses on the impact of policy measures on the level of investments have been carried out, there is no agreement on their effectiveness. Indeed, the policy and regulatory stance of the capital-exporting country has been largely neglected and HCMs towards O-FDI are scarcely discussed in the literature. The relative scarcity of empirical studies of the impacts of these FDI-specific policies is surprising in light of the strong policy interest in the issue and the active role towards FDI that government policy in most countries has taken. Within this context, this study investigates the effectiveness of Italian HCMs by developing an empirical model that uses information on the population of Italian firms that received incentives from 2000-2006. Data, aggregated at the regional level, refer to the major public tools addressed to promoting Italian companies’ FDIs outside the European Union. The objective is to identify the effectiveness of investment support by measuring the impact of different HCMs on regional levels of internationalisation. The analysis suggests that not all the provided measures generate intended effects. In particular financial incentives (i.e. equity and venture capital funds) and regional service encourage investment activity and hence can induce business growth and competitiveness and reduce regional disparities. On the contrary, feasibility studies and other public services seem to be ineffective, as they do not generate an increase in the level of internationalisation.