Best Policy Practices for Promoting Inward and Outward Foreign ...

Best Policy Practices for Promoting Inward and Outward Foreign ...

imposed on foreign investors would discourage inflows

of direct investment, other things being constant. However,

it should be noted that very few studies focus on how

these variables affect FDI. Furthermore, it is possible

that the costs imposed on foreign investors by such

requirements are implicitly passed on to host country

firms in the form of lower acquisition prices.

Relatively few studies identify the relationship of openness

variables to FDO. In the few cases where findings

are reported, the results are mixed. In brief, available

studies provide no consistent evidence on whether the

openness of the home country to investment and trade

encourages outward direct investment.

4 . country resource attributes: labour Force

characteristics and r&d capabilities

Table 6 summarizes findings with respect to the

resource attributes of host and home countries, particularly

the characteristics of the labour force. Once again,

relatively little evidence is available on the determinants

of FDO. However, the evidence linking labour force

characteristics and FDI is quite consistent. Specifically,

foreign direct investment is attracted to host countries

Table 6

Summary of Empirical Findings on the

Determinants of FDI and FDO: Resources

resource variable


to Fdi


to Fdo

R&D activeness Positive Positive

Skill endowment Positive n.a.

Total employment Positive n.a.

Unit wages Negative n.a.

Unionization Mixed n.a.

Large, liquid

stock markets

Positive Positive

Interest rates Negative n.a.

Note: “n.a.” indicates only a small number of studies reported

results for the variable in question, such that no reliable inferences

about the variable could be drawn.

Source: Steven Globerman and Victor Zitian Chen.

The Conference Board of Canada | 11

possessing a skilled and educated workforce. On the

other hand, higher unit costs of labour discourage

inward foreign direct investment, although unionization,

per se, is not linked consistently, either positively or

negatively, to FDI. R&D capabilities, as well as an

active innovation system more generally, attract foreign

direct investment to host countries. Interestingly, R&D

also encourages outward direct investment from home

countries. This finding, again, presumably reflects the

fact that countries characterized by advanced innovation

activities are likely home to efficient and highly successful

multinational companies that, in turn, seek to

exploit their competitive advantages in foreign markets,

often through FDO.

available studies provide no consistent evidence on

whether the openness of the home country to investment

and trade encourages outward direct investment .

5 . Tax structures

Given the relatively few studies that link host and homecountry

tax structures to FDI and FDO, it was not worthwhile

to create a separate summary table. Suffice it to say

that most of those few studies focus on the corporate tax

rate. On balance, a higher host-country corporate tax rate

discourages inward foreign direct investment. Specifically,

we identified 14 studies that attempted to link corporate

tax rates to FDI. Nine of the studies identified a statistically

significant and negative linkage, while five studies

found no statistically significant relationship between the

two variables. 3 A handful of studies also focus on other

indicators of the tax structures of host and home countries,

such as income taxes or total tax revenues as a ratio of

GDP. While the individual number of such studies is

small, they tend to identify higher taxes as having a statistically

significant and negative impact on inward foreign

direct investment. A very few studies (four, to be precise)

discussed findings for the relationship between homecountry

tax rates and outward foreign direct investment.

3 In his review of the literature, Moran (2005) concludes that tax

considerations have become more important influences on the

location decisions of multinational companies since 1990. He also

asserts that multinational companies have become more responsive

to tax concessions and other investment incentives.

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