Shifting Advantages: Do Subsidies Shape Cross-Border Investment?

Michele Ruta and Monika Sztajerowska

No 2025/080, IMF Working Papers from International Monetary Fund

Abstract: Industrial policies have been on the rise with subsidies provided to firms accounting for the lion’s share of interventions. The effects of these measures on productivity, trade, investment and other economic and non-economic variables are largely an open question. This paper examines empirically the link between subsidies and inward cross-border investment using data on greenfield investments across a large sample of advanced and emerging economies between 2010 and 2020. Employing a difference-in-difference approach, we find that—while the average effect of all subsidies is zero—financial subsidies, such as loans and loan guarantees, increase new cross-border investment projects by an average of 7%. These effects are primarily driven by capital-intensive sectors in capital-abundant countries, suggesting that subsidies can affect foreign direct investment—but they reinforce (rather than reshape) countries’ comparative advantage.

Keywords: Foreign Direct Investment; Industrial Policy; Subsidies; investment project; cross-border investment; shifting advantage; country-sector pair; country-sector dyad; Capital productivity; Comparative advantage; Human capital; Global (search for similar items in EconPapers)
Pages: 57
Date: 2025-04-11
New Economics Papers: this item is included in nep-fdg
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