Multinational Investment Attraction: Principal-Agent Considerations
International Journal of the Economics of Business, Vol. 6, No. 1, 1999
Posted: 8 Nov 2001
The location decisions of multinational enterprises (MNEs) are increasingly becoming the targets of lobbying efforts by government inward investment agencies (IIAs). This is related to the increasing mobility of MNE operations as the firms seek to rationalize and leverage their international networks. Prisoners' dilemma considerations are one element of the strategic competition amongst such agencies to secure the location of foreign direct investment (FDI) in their jurisdictions. However, while such activities may be collectively sub-optimal, they represent Nash best response strategies for individual governments. This paper focuses on the problem of how best to structure the investment supports. Five different types of investment supports are theoretically and empirically analyzed. In each case the principal-agent relationships between the government, the IIA and the MNE investor are assessed in the strategic context. Theoretical analysis suggests that in some cases, governments may prefer support schemes that appear to be more expensive, but have better incentive or risk-sharing implications. Empirical analysis suggests that MNE firm characteristics are related to the type of investment support package obtained. In particular, MNEs with substantial local experience (looking to expand or enhance operations) are more interested in tax concessions, while those with high levels of local factor dependence are more interested in infrastructure development. These results imply that policy-makers in government and in IIAs need to follow a two-stage strategy to be successful in FDI attraction. The first stage consists of 'targeting' the most appropriate MNEs and the second stage consists of 'tailoring' the appropriate package of incentives for the firms being considered. Undertaking the first stage without the second is unlikely to yield the desired results.
Key words: government investment supports, MNE investment location, principal-agent theory
Note: This is a description of the article and not the actual abstract.
JEL Classification: F250, F130, F210
Suggested Citation: Suggested Citation