10 | BestPolicyPracticesforPromotingInwardandOutwardForeign Direct Investment—October 2010 for FDI. A plausible reason is that some relatively small economies such as The Netherlands and Canada are also home to a significant number of multinational companies. 2 . industry and infrastructure conditions Table 4 summarizes empirical results for variables describing industry conditions in home and host countries, as well as infrastructure conditions. The main conclusion to be drawn is that political stability, protection of property rights, rule of law, and a relatively efficient public sector are strong attractors of FDI. So is good physical infrastructure in the host country, including transportation and communication facilities. Very few studies identify the impact of industry conditions and infrastructure on FDO. If their impacts were estimated, the findings would likely be mixed. On the one hand, good infrastructure in the home country should make it more profitable to operate in the home country and therefore discourage outward direct investments. On the other hand, good home-country infrastructure should promote the emergence and growth of competitive multinational companies that are willing and able to Table 4 Summary of Empirical Findings on the Determinants of FDI and FDO: Industry Attributes and Infrastructure Industry attributes Competitive conditions Productivity and growth Infrastructure Socio-political stability Protection of property rights relationship to Fdi Mixed Mixed Positive n.a. Positive n.a. Positive n.a. Government efficiency Positive n.a. Physical infrastructure Positive n.a. relationship to Fdo Note: “Mixed” means that the positive and negative results for the variable in question were about equal in number, and/or the majority of the results for the variable in question were not statistically significant; “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. Find this report and other Conference Board research at www .e-library .ca undertake profitable FDO. In any case, it is clear from the literature that effective public governance is a key factor encouraging inward direct investment. 3 . openness to Foreign investment and Trade Table 5 summarizes the findings from studies that include measures of an economy’s openness to foreign investment and trade. It is not surprising to find that foreign investment approval procedures, such as those mandated under Canada’s Foreign Investment Review Act and its successor legislation (the Investment Canada Act), discourage inward direct investment. Also unsurprising is the finding that foreign ownership restrictions are negatively related to FDI. Somewhat less expected are the findings that subsidies to foreign investors, as well as requirements imposed on foreign investors, such as requirements to undertake a minimum level of exporting or to purchase inputs from local suppliers, are not consistently related in a positive or negative way to FDI. One would have expected to find that requirements Table 5 Summary of Empirical Findings on the Determinants of FDI and FDO: Openness to Trade and Investment openness variable relationship to Fdi Investment protection Negative Mixed Foreign ownership restrictions Investment promotion agencies Negative n.a. Positive n.a. Subsidies Mixed n.a. Requirements Mixed n.a. Trade to GDP ratio Positive Mixed Tariff and other barriers Mixed Mixed relationship to Fdo Note: “Mixed” means that the positive and negative results for the variable in question were about equal in number, and/or the majority of the results for the variable in question were not statistically significant; “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.
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 relationship to Fdi relationship 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. Find this report and other Conference Board research at www .e-library .ca