The Impact of Host Country

Government Policy on US
Multinational Investment Decisions
Christopher T. Taylor
1. INTRODUCTION
F
OREIGN direct investment (FDI) is playing an increasing role in the world
economy. One-half of all trade and one-fifth of world GDP are attributable
to multinational corporations (Rugman, 1988). The sales of firms affiliated with
US-based multinationals are over twice the size of US exports. Exports from US-
based firms to affiliates abroad accounted for approximately one-third of total US
exports. In addition, despite the large share of US exports accounted for by
multinational corporations, sales of goods in foreign countries by majority-owned
foreign affiliates of US firms are over five times the size of US exports by
multinationals (US Department of Commerce, 1995). In addition, the importance
of investment of multinationals to a countrys growth or productivity is being
scrutinised. Some researchers have found that FDI is more important to a
countrys growth than domestic investment since investment by multinationals
includes improved technology (Borensztein, de-Gregorio and Lee, 1995; and
Blomstrom, Lipsey and Zejan, 1992). Others, however, have found that there are
no productivity differences between foreign and domestic firms
1
(Globerman et
al., 1994).
Blackwell Publishers Ltd 2000, 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA. 635
CHRISTOPHER T. TAYLOR is an economist at the Federal Trade Commission. Views and
opinions expressed in this paper are solely those of the author and should not be interpreted as
reflecting the views of the Federal Trade Commission, any of its individual Commissioners, or
other members of the staff. Comments on this work from Arona Butcher, Michael Ferrantino,
William Donnelly, an anonymous referee, and the participants of the US International Trade
Commission workshops on the Dynamic Effects of Trade Liberalisation are gratefully acknow-
ledged.
1
The differences in these results may be attributable to the countries being examined. Lesser
developed countries may see productivity benefits that more developed countries do not. However,
the productivity impact of foreign investment is still an open question.
Given the importance of FDI, the impact of government trade and investment
policy on FDI is an important policy issue. Trade liberalisation or openness is
sometimes accompanied by a decrease in restrictions on foreign investment. In
addition, trade and FDI may be substitutes or complements in serving local
markets. Because of these two tendencies, it is useful to consider these two issues
jointly. Do more open countries, in terms of trade and FDI policy, attract more
investment? Before reviewing and extending the evidence on the relationship
between FDI and government policy, it is useful to examine the trends in the
amount of US-owned or controlled assets.
Table 1 presents data on the assets of US affiliates abroad.
2
The assets of
affiliates represent the total assets of firms in which the US-based multinationals
own at least ten per cent. In 1997, the assets of US affiliates abroad were
approaching 3.4 trillion dollars. The majority of these investments are in Europe.
Canada and Japan are also significant locations of US affiliates. This is consistent
with other researchers findings on the location of FDI globally. Hummels and
Stern (1994) find that developed countries were the source of 97 per cent of
investment and received 75 per cent of FDI in 1985. The average annual growth
rate in the last column of Table 1 shows that the assets of US affiliates abroad
increased by over 11 per cent per year between 1983 and 1997. While the assets
of US affiliates are growing faster in the developed world, growth in Other Asia,
which is primarily developing countries, is growing quickly as well. However,
2
There are a number of different measures of the size of foreign investment by US-based
multinationals. In this paper data on the assets of multinational affiliates are used. One reason for
using asset data rather than flow data is investment flows that pass through a country on the way to
a final destination, get counted as FDI for the first country. An example would be an investment
that passes through an offshore financial centre (US Department of Commerce, 1995). The use of
asset data rather than investment flow data is consistent with Wheeler and Mody (1992).
TABLE 1
Assets of US Foreign Affiliates
Country 1983 1997 1997 19831997
Millions of Dollars Share (%) Annual Growth (%)
All Countries 750,823 3,397,262 100.00 11.39
Canada 114,609 294,943 8.68 6.99
Europe 295,764 1,914,373 56.35 14.27
Japan 52,438 266,028 7.83 12.30
Australia/New Zealand 33,838 118,149 3.48 9.34
Latin America/W. Hemisphere 153,612 458,889 13.51 8.13
Africa 22,870 40,602 1.20 4.19
Middle East 22,271 39,411 1.16 4.16
Other Asia 39,535 243,941 7.18 13.89
Other International 15,886 20,926 0.61 1.99
Source: US Department of Commerce, Survey of Current Business (1999).
636 CHRISTOPHER T. TAYLOR
Blackwell Publishers Ltd 2000
even with the rapid growth in Asia outside of Japan, this region still accounts for
only seven per cent of the assets of US affiliates.
The following section of the paper reviews the previous research on the effects
of government policy on FDI and the previous measures of openness used in
these investigations. Section 3 describes the hypothesis tested concerning the
relationship between changes in US multinational investment and host
government policy and the data used. Section 4 presents and discusses the
estimates. The final section presents concluding comments on the relationship of
government policy and FDI.
2. THE EFFECT OF GOVERNMENT POLICY ON FOREIGN INVESTMENT
While there are many determinants of FDI other than government policy, this
review focuses on those determinants related to government policy. A number of
articles have examined the effects of trade policy on FDI. Some of the articles in
this literature are described below to give a range of results. A lesser amount of
research has been done on the impact of FDI policy on foreign investment.
Markusen (1995) summarises the results of recent research on the relationship
between trade barriers and FDI by stating that trade barriers cause a substitution
toward FDI, but they also depress both trade and investment. Thus high barriers
to trade will tend to cause a substitution away from exports to a country towards
FDI (affiliate sales), but simultaneously depress both trade and investment.
Early research suggested that the higher the tariff level in a country and
industry, the higher the investment. In order to overcome tariffs, firms could
invest in manufacturing within the country in question, i.e. tariff-jumping
investment. This result implies that exports from the multinationals home
country and affiliate sales generated by FDI are substitutes, given the existence of
trade barriers. Horst (1972) examined a cross-section of industries in Canada; the
results showed a negative relationship between other countries exports and
tariffs. The higher the tariff the more likely a US firm was to supply the Canadian
market from Canadian affiliates. Orr (1975) found that these results were not
robust to slight variations in the data set. When less aggregated industry
groupings were used the negative relationship between tariffs and exports
disappeared. Other studies have shown a negative relationship between tariffs and
FDI (Nicholas, 1986; and Hollander, 1984). There are also a number of studies
that found no relationship between tariffs and exports as a substitute for
investment (Buckley and Dunning, 1976; and Ferrantino, 1993).
Brainard (1997) examines substitution between exports and foreign affiliate
sales in a jointly determined framework with explicit incorporation of tariff and
non-tariff barriers. As an elasticity the relationship between tariffs and affiliate
sales is shown as between 0.38 to 0.45. For example, for a one per cent increase
THE IMPACT OF HOST COUNTRY POLICY ON INVESTMENT 637
Blackwell Publishers Ltd 2000
in the tariff there is an increase of approximately one-third to one-half per cent in
affiliate sales.
Government policy on FDI can be more complex than trade policy. Often FDI
policy is in reality a group of policies rather than a policy. Some governments
place restrictions on FDI such as technology transfer requirements, local-content
requirements or sectoral prohibitions. Governments also give incentives for
foreign investments such as lower operating taxes or tariff breaks on imported
inputs. A countrys FDI policy also includes the legal protection afforded to
foreign investors against such threats as expropriation. With an increased interest
in bilateral and multilateral investment negotiations, the effect of FDI liberal-
isation on FDI flows is important. The investment agreement in the Uruguay
Round on trade-related investment measures (e.g., minimum export and local
content requirements) and domestic regulations that may impede FDI (e.g.,
licensing requirements) was a move toward liberalising the investment
environment. This negotiating process is only beginning, and other more wide-
ranging investment agreements are under discussion.
The complexities of FDI regimes and their varying effects make empirical
estimation challenging. In order to measure the effect of FDI policy, a measure of
the restrictiveness or openness of a countrys FDI policy must be constructed.
The empirical work to this point has relied on a tally of the number of restrictions
on or incentives for FDI that exist in a country. Therefore, most evidence on the
effect of FDI policy on FDI is still anecdotal or covered in case studies. The case
study research emphasises the effect of inducements more than restrictions.
Reuber (1973) shows that a variety of inducements are offered to investors
including tariff protection; import quota protection; tariff reductions on imported
equipment, imported components and tariff reductions on imported raw
materials; tax holidays; accelerated depreciation of plant and equipment for tax
purposes; and government-built infrastructure. In the case studies the author does
not find a significant effect of these inducements on increasing FDI. The survey
of companies suggests that firms believe governments that give inducements to
attract investment will raise firm costs in other ways to recover lost revenue. This
paper also summarises previous empirical studies on the impact of FDI
restrictions and incentives, which show mixed results. Guisinger and Associates
(1985) wrote case studies of 74 major investments in 30 countries. They found
that over 50 per cent of these investments benefited from some type of
inducement. Also the number of inducements was actually greater for
investments to serve the local market than it was for exports.
There has been some empirical work on cumulative FDI openness measures
effects on FDI. Brainard (1997) finds a sizeable negative effect of FDI barriers
and affiliate sales. FDI barriers are measured by using a survey measure from the
World Competitiveness Report. For a one per cent increase in FDI barriers there
is a 3.2 per cent decrease in affiliate sales, while exports increase by 1.6 per cent.
638 CHRISTOPHER T. TAYLOR
Blackwell Publishers Ltd 2000
Ferrantino (1993) finds restrictive policies on FDI lessen the amount of
investment in a country as well. His measure of FDI openness is derived from the
US Commerce Department FDI surveys. Wheeler and Mody (1992) examine US
multinational investment in manufacturing and electronics. One of the variables
in their analysis is an openness measure that combines both trade and investment
policy variables. They find the more open countries have less investment.
However, the effect that they find for openness on investment is small. In
addition, sensitivity testing showed these results to be somewhat unstable.
Throughout the literature on the relationship between trade and FDI policy and
FDI and a somewhat separate literature on openness and productivity or growth,
many different measures of openness are used. Edwards (1998) reviews a number
of trade openness measures that have been used in previous research. In addition,
his regressions show that best performing trade openness measures are the
multidimensional measures drawn from the World Development Report and the
Heritage Foundation. One of the worst performing measures of openness in his
empirical work was the tariff rate.
In addition to the choice of openness measure there are a number of
endogeneity issues with using openness measures (Edwards, 1998; and Rodrik,
1995). For example, more open countries may grow faster. Countries that have
attracted FDI in the past may be more open. In an attempt to mitigate these
endogeneity issues, the regressions in this paper were run for various time periods
using the same openness measure. By looking at both past and future flows with
the same openness measure the regressors become predetermined.
3. HYPOTHESES AND DATA DESCRIPTION
In this analysis of the effect of trade and FDI policy on investment, two
hypotheses are tested. First, do countries with greater openness to FDI, measured
by the restrictions placed on FDI, receive larger or smaller amounts of investment
by US multinationals? Second, does a relationship exist between investment flows
and openness to trade? Since the previous research on these relationships comes to
very mixed conclusions, there can be no maintained hypotheses. The rest of the
variables in the analysis are other determinants of FDI suggested by the literature.
In terms of country-specific determinants of FDI, there are a few categories of
variables typically used. One category attempts to measure the attractiveness of
the market. In other words, variables such as GDP (for the size of the market),
GDP per capita (for the wealth of the market) and growth in GDP (for the growth
in the market) could all be positively related to investment. Another category of
variables measures the attractiveness of the market for production. Variables such
as labour cost can be used as a determinant of FDI. Other variables which gauge
the overall attractiveness of the market include inflation and exchange rate
THE IMPACT OF HOST COUNTRY POLICY ON INVESTMENT 639
Blackwell Publishers Ltd 2000
variation which have been used to measure macroeconomic policies and risk.
Each of the above variables is used in empirical research on FDI, depending on
data availability and the specific research question. Industry-specific variables
such as the level of corporate profits in the industry are used as well.
The dependent variables in this analysis are the change in the dollar value of
the assets of US affiliates in a cross-section of countries and industries. The
analysis is performed for two time periods and for a cross-section of industries.
3
There are 37 countries for which all the variables were available. These 37
countries represent a broad cross-section of developed and developing countries.
Most of the countries in the OECD, Latin America and Asia are included in this
sample.
The general specification is a reduced-form investment equation. Due to the
number of observations available in examining US FDI flows in cross-section,
only a limited number of determinants of FDI flows are analysed.
4
FDI is shown
as a function of trade and FDI openness, the size of the economy, gross domestic
product (GDP), the stability of the economy, inflation, cost of production, wages
and the profit rate for a previous year. Below is the specification used in this
analysis along with a summary of the expected relationships.
FDI = F(Trade Openness, FDI Openness, GDP, Inflation, Wages, Profits)
= =
Four sets of regressions are estimated using the above specification: (1) A
regression for the change in the assets of US affiliates for 39 countries between
1983 and 1997. (2) A regression for the change in the assets of US affiliates for the
39 countries between 1983 and 1993. (3) A regression for the 28 countries and
three industries using industry dummy variables to separate industry effects for the
change in assets of US affiliates between 1983 and 1993. (4) For each industry, the
above specification is estimated separately allowing for a correlation across the
errors of the three regressions, a system of seemingly unrelated regressions.
The variables in this analysis are shown with means and standard deviations in
Table 2. The dependent variables are the first three in the table: Change in total
assets of US affiliates between 1983 and 1997 and between 1983 and 1993 and
change in total assets of US affiliates between 1983 and 1993 by industry. Thirty-
nine countries have data for the change of assets of US affiliates between 1983
and 1993 and between 1983 and 1997. A subset of 22 of these 39 countries had
complete asset data for 1993 in the three broad industry categories: services,
3
Using a panel of yearly observations was investigated but rejected. Most of the variation in the
openness measures is by country not by time. See Wheeler and Mody (1992) for a discussion of this
issue.
4
Other variables such as GDP per capita, GDP growth and exchange rate variation were used in
the specifications but were not significant. These variables were dropped to preserve degrees of
freedom and did not significantly affect the results.
640 CHRISTOPHER T. TAYLOR
Blackwell Publishers Ltd 2000
manufacturing and petroleum. Six other countries are missing data on one of the
industry categories, but have data for previous years or for 1994 or 1995 that
allow imputation of the missing data from column and row totals. There are
observations for the three industries in the 28 countries, giving 84 observations.
5
Some of the means and standard deviations in Table 2 are worthy of
discussion. The FDI and trade openness variables have mean values of 5.88 and
6.81 and standard deviations of 1.05 and 1.79 respectively. Most countries have
an openness rating for FDI between 3 and 8 and for trade between 3 and 10. The
mean values and standard deviations of GDP, inflation, wages 1993 and profit
1983 show the large variation in these variables across the sample countries. This
large variation is an artefact of having a broad sample of developed and
developing countries.
The measure of FDI openness is calculated from a series of questions from the
World Competitiveness Report for 1993. FDI openness is calculated by the
average score on the following survey questions: ease of hiring and firing, price
controls, security, the development of the justice system, anti-trust regulations,
restrictions on foreign investment, transparency of regulations, the development
of an intellectual property regime, and the ease of cross-border ventures.
6
5
This data comes from the US Department of Commerce (1994). The 28 countries are Argentina,
Australia, Belgium, Brazil, Canada, China, France, Germany, Greece, Hong Kong, India, Ireland,
Italy, Japan, Korea (Rep.), Mexico, Netherlands, New Zealand, Norway, Philippines, Portugal,
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey and the United Kingdom.
6
The correlation between the openness measures for trade and investment is 0.40. There are a
considerable number of countries which are relatively open to trade but not to investment or vice-
versa. Only five countries are common to the ten least open countries with respect to trade and with
respect to investment.
TABLE 2
Data Used in Analysis
Variable Mean Standard
Deviation
Change in Total Assets (198393 in millions of US dollars) 31,278.4 70,816.2
Change in Total Assets (198397 in millions of US dollars) 63,328.3 137,179.2
Change in Total Assets by Industry
(198393 in millions of US dollars)
Services 27,989.4 66,013.5
Manufacturing 10,070.6 13,949.4
Petroleum 1,090.3 4,631.1
FDI openness (survey measure 010) 5.875 1.048
Trade openness (survey measure 010) 6.807 1.793
Gross domestic product (1993 in millions of 1987 dollars) 250,731 410,851
Inflation 1993 (in per cent) 85.25 404.87
Wages 1993 (in thousands of current dollars) 28.64 15.74
Profit 1988 (net income on sales in per cent) 0.0584 0.0460
Source: See text.
THE IMPACT OF HOST COUNTRY POLICY ON INVESTMENT 641
Blackwell Publishers Ltd 2000
The measure of trade openness in this analysis comes from the World
Competitiveness Report for 1993. One of the survey questions in this report
concerns the degree to which government policy discourages imports. The results
of this survey question rank countries between 1 and 10 with respect to trade
openness.
The data for the other determinants of FDI come from a variety of sources.
GDP and the inflation measure, the GDP deflator, for 1993 comes from the World
Bank Development Indicators database. The measure of wages comes from the
US Department of Commerce (1994). Wages paid to workers of US affiliates are
divided by the number of workers at US affiliates for a given country in 1993. All
of the data are in logarithmic form except profits due to existence of negative
values.
The wealth of the host economy, as measured by GDP per capita, is expected
to be positively related to investment. The countrys macroeconomic stability, as
measured by the inflation rate, is expected to be positively related to FDI.
Surveys and case studies have shown that firms like stability since it eases
planning and decision making. The wage rate paid by US affiliates in the country
is expected to be negatively related to FDI. Investing in a country with high
wages is not attractive all else being equal. Profit is expected to be positively
related to the change in FDI over the period. Higher profit rates in previous
periods will attract more investment. For the change in assets from 19831993
the profit rate in 1988 was used. For the change in assets for the 19831997
period the profit rate for 1993 was used.
7
4. EMPIRICAL RESULTS
Tables 3 and 4 present the results of the series of regressions on the
determinants of investment by US multinationals. Table 3 shows the results of
regressions of the change in total assets of US affiliates abroad for the sample of
39 countries, for two time periods, and for 28 countries separated into the three
industry groupings. Table 4 displays the results for the system of regressions, one
for each industry, for the 28 countries. The adjusted R-squared across the
regressions ranges between 72.9 and 95.4 showing a reasonably good fit for
cross-sectional analysis.
The relationship between FDI openness and investment is similar in the
regressions on Table 3 and is significant at the 99 per cent confidence level.
These coefficients suggest a one per cent increase in FDI openness leads to a 34
per cent larger flow of investment or increase in the assets of US affiliates in the
7
Sensitivity testing of the results showed that there was a lag in profit rates affecting investment
flows, and the effect of profits on investment flows was of a limited duration.
642 CHRISTOPHER T. TAYLOR
Blackwell Publishers Ltd 2000
TABLE 3
Change in Foreign Direct Investment Assets:
Coefficients and t-Statistics
2
FDI FDI Trade GDP Inflation Wages Profit
4
Petroleum Manufacturing Constant Adj. R
2
f-stat.
Measure
1
Openness
1
Openness
1
1993
1
1993
1
1993
1
Total 4.05** 1.06* 1.07** 0.08 0.42** 11.34** (
3
) (
3
) 10.56** 72.90 18.14
19831997 (4.96) (1.97) (8.11) (0.86) (1.92) (4.41) (4.41)
Total 3.31** 1.29* 1.29** 0.04 0.72** 7.90** (
3
) (
3
) 11.18** 77.80 19.99
19831993 (3.48) (1.87) (10.23) (0.70) (2.79) (3.03) (-3.46)
By Industry 3.11** 1.06* 0.91** 0.22** 0.16 2.12 2.25** 0.26 7.84** 91.44 81.62
19831993 (3.81) (1.90) (6.19) (2.53) (0.54) (0.84) (7.59) (0.92) (2.25)
Notes:
1
Variables in natural logs.
2
t-Statistics reported are heteroscedastic-consistent using the White procedure.
3
Not applicable.
4
Profit is 1988 for regressions with data for 198393 and 1993 for 198397.
** Significant at the 5 per cent confidence level.
* Significant at the 10 per cent confidence level.

B
l
a
c
k
w
e
l
l
P
u
b
l
i
s
h
e
r
s
L
t
d
2
0
0
0
country. For example, if Turkey or South Africa were to increase their openness
score from approximately 5 to the level of the United Kingdom at approximately
7, the regression would predict a corresponding increase in the investment flows
of over 100 per cent.
8
This change is a sizeable increase in investment, but it is
obtained by comparing two of the more closed regimes to one of the more open
regimes in the survey. It is a movement from approximately the mean FDI
openness to one standard deviation above.
The trade openness measure is positive and significantly related to FDI flows.
In other words, trade openness and US FDI increase or decrease together. The
coefficients on trade openness range between 1.06 and 1.29, showing the more
open a countrys trading regime, the more investment it attracts. Three other
measures of trade openness were examined: the average most favoured nation
(MFN) tariff rate, the range of MFN tariff rates, and the non-tariff barrier
coverage ratio. None of these measures when used in the regressions showed a
significant relationship to FDI. That the most useful openness measures tend to be
multidimensional corresponds to the results in Edwards (1998). Since the
government policies tend to be multidimensional, the measures of the policies
need to be as well.
The other determinants of FDI shown in Table 3, GDP, inflation, wages and
profit, show results similar to those found in the literature. GDP has a positive
and significant coefficient of approximately one throughout the regressions. This
estimate suggests a one per cent increase in GDP accompanies a one per cent
increase in investment flows. The wages and inflation measures are both
negatively related to FDI as hypothesised. However, these relationships are not
always significant. The profit measure, return on sales in 1988, is positively and
significantly related to FDI in the two overall regressions. The greater the profit
rate of US affiliates in the country in a previous year, the larger the increase in
investment.
The third regression on Table 3 suggests there are significant differences
across the industries with respect to US multinational investment flows across
industries. The petroleum industry is significantly different from services and
manufacturing. In addition the restriction that all three industries have the same
coefficients for the independent variables was rejected. These differences led to
the specification of separate industry effects regressions shown in Table 4.
Independence of the error terms across the industries was rejected so a system of
seemingly unrelated regressions was estimated.
FDI openness continues to show a positive and significant relationship to
investment flows in Table 4. However, FDI openness is more important in
services than in petroleum or manufacturing. This may be due to the large
8
This is calculated by multiplying the percentage change of FDI openness from 5 to 7 by the
coefficient on the FDI openness variable in the regression.
644 CHRISTOPHER T. TAYLOR
Blackwell Publishers Ltd 2000
TABLE 4
Change in Foreign Direct Investment Assets by Industry 19831993:
Coefficients of Seemingly Unrelated Regression and t-Statistics
2
FDI by FDI Trade GDP Inflation Wages Profit Constant Adj. R
2 3
Industry Openness
1
Openness
1
1993
1
1993
1
1993
1
1988
Manufacturing
1
2.31** 1.18** 0.90** 0.13 0.24 2.98 5.38 95.4
(2.54) (2.03) (5.50) (1.41) (0.83) (1.09) (1.35)
Petroleum
1
2.91** 0.08 0.69 0.22* 0.10 3.94 7.70 93.1
(2.20) (0.93) (2.84) (1.64) (0.83) (0.98) (1.36)
Services
1
4.75** 0.77 1.21** 0.19* 0.69** 10.91** 12.68** 91.9
(4.82) (0.96) (7.29) (1.66) (2.22) (3.49) (3.25)
Notes:
1
Variables in natural logs.
2
t-Statistics reported are calculated using the quadratic form of the analytic first derivative.
3
Adj. R
2
is for estimation of the separate equations.
** Significant at the 5 per cent confidence level
* Significant at the 10 per cent confidence level.

B
l
a
c
k
w
e
l
l
P
u
b
l
i
s
h
e
r
s
L
t
d
2
0
0
0
increase in services investment over the time period or the type of services being
provided. Only in the manufacturing regression is trade openness significantly
related to FDI flows. This is not unexpected since this is the industry where the
presence of imported inputs may be most important. GDP is significant in the
services and manufacturing equations with a coefficient of approximately one.
This is consistent with results in Table 3. This is not surprising since investment
in petroleum would be driven by the natural resource, not necessarily an interest
in serving the host countries market. Wages have a negative and significant
relationship for services FDI. The higher the wage rate, the less investment in
services industries. Profit shows a positive and significant relationship to the flow
of FDI into services.
5. CONCLUSIONS
In this article prior research on the relationship between government policy on
trade and investment and FDI was reviewed and new estimates on the
relationship between government policy and US FDI were presented. The results
of this empirical investigation suggest that countries with more open policies in
terms of trade and investment attract larger amounts of US FDI, all else equal.
While Brainard (1997) finds a slightly smaller elasticity of affiliate sales to FDI
openness, the results of FDI openness in this paper are of a similar magnitude.
Interestingly, the policy variables for trade and investment openness typically
had some of the larger impacts on US investment flows. FDI openness in terms of
an elasticity has the largest effect of the determinants examined and, from a
policy perspective, may be easier to change than the other determinants.
However, FDI policy is really a set of policies, as stated earlier. Any number of
government policies, from labour to intellectual property protection, can act to
discourage investment.
The results across industries have important policy implications as well. The
results suggest that to attract manufacturing FDI, openness in both trade and
investment is important. Investment openness is important in attracting petroleum
and services investment while trade openness seems to be less important.
Since government policies on trade and investment tend to be multi-
dimensional, measurement of those policies needs to be multidimensional as
well. The above regressions revealed that the survey measure of a countrys trade
openness was significant while more standard measures like tariff rates and non-
tariff barrier coverage ratios were not. Collection of a time series of
multidimensional trade and FDI openness measures would greatly facilitate
research on the effects of government policy on investment and other related
issues.
646 CHRISTOPHER T. TAYLOR
Blackwell Publishers Ltd 2000
REFERENCES
Blomstrom, M., R. Lipsey and M. Zejan (1992), What Explains Developing Country Growth,
Working Paper No. 4132 (National Bureau of Economic Research).
Borensztein, E., J. de-Gregorio, and J. Lee (1995), How Does Foreign Direct Investment Affect
Economic Growth?, Working Paper No. 5057 (National Bureau of Economic Research).
Brainard, S.L. (1997), An Empirical Assessment of the Proximity-Concentration Tradeoff
Between Multinational Sales and Trade, American Economic Review, 87, 52044.
Buckley, P.J. and J.H. Dunning (1976), The Industrial Structure of US Direct Investment in the
U.K., Journal of International Business Studies, 7, 513.
Edwards, S. (1998), Openness, Productivity and Growth: What Do We Really Know?, Economic
Journal, 108, 38398.
Ferrantino, M. (1993), The Effects of Intellectual Property Rights on International Trade and
Investment, Welwirtsch. Archiv, 129, 30031.
Globerman, S., J.C. Ries and I. Vertinsky (1994), The Economic Performance of Foreign Affiliates
in Canada, Canadian Journal of Economics, 27, 14356.
Guisinger, S.E. and Associates (1985), Investment Incentives and Performance Requirements (New
York: Praeger).
Hollander, A. (1984), Foreign Location Decision by US Transnational Firms: An Empirical
Study, Managerial and Decision Economics, 5, 718.
Horst, T. (1972), The Industrial Composition of US Exports and Subsidiary Sales to the Canadian
Market, American Economic Review, 62, 3745.
Hummels, D. and R.M. Stern (1994), Evolving Patterns of North American Merchandise Trade
and Foreign Direct Investment, The World Economy, 17, 529.
Markusen, J. (1995), The Boundaries of Multinational Enterprises and the Theory of International
Trade, Journal of Economic Perspectives, 9, 16989.
Nicholas, S. (1986), The Theory of Multinational Enterprises as a Transaction Mode, in P. Hertner
and G. Jones (eds.), Multinationals: Theory and History (Aldershot: Gower).
Orr, D. (1975), The Industrial Composition of US Exports and Subsidiary Sales to the Canadian
Market: Comment, American Economic Review, 65, 23034.
Reuber, G.L. (1973), Foreign Investment in Canada: A Review, in D. Auld (ed.), Contemporary
Economic Problems in Canada (Toronto: Holt, Reinhart and Winston).
Rodrick, D. (1995), Trade Policy and Industrial Reform, in J. Behrman and T.N. Srinivasan (eds.),
Handbook of Development Economics, 3 (Amsterdam: North-Holland).
Rugman, A.R. (1988) The Multinational Enterprise, in P. Walter and T. Murray (eds.), Handbook
of International Management (New York: Wiley).
US Department of Commerce (19841999), US Direct Investment Abroad, various issues.
US Department of Commerce (1995), A Guide to BEA Statistics on US Multinational Companies,
Survey of Current Business (March), 3856.
Wheeler, D. and A. Mody (1992), International Investment Location Decisions, Journal of
International Economics, 33, 5776.
World Bank (1997), World Development Indicators, CD Rom (Washington DC, World Bank).
World Economic Forum, and International Institute for Management Development (1993), World
Competitiveness Report (Geneva).
THE IMPACT OF HOST COUNTRY POLICY ON INVESTMENT 647
Blackwell Publishers Ltd 2000