The Impact of Host Country Government Policy on US Multinational Investment Decisions

Foreign direct investment (FDI) is playing an increasing role in the world economy. Some researchers have found that FDI is more important to a country's growth than domestic investment since investment by multinationals includes improved technology. Others, however have found that there are no productivity differences between foreign and domestic firms. Given the importance of FDI, the impact of government trade and investment policy on FDI is an important policy issue. In addition, trade and FDI may be substitutes or complements in serving local markets. Because of these two tendencies, it is useful to consider whether open countries, in terms of trade and FDI policy, attract more investment. Prior research on the relationship between government policy on trade and investment and FDI is reviewed, and new estimates on the relationship between government policy and US FDI are presented.