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Incentivizing embedded investment: Evidence from patterns of foreign direct investment in Latin America

Sarah Bauerle Danzman () and Alexander Slaski ()
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Sarah Bauerle Danzman: Indiana University Bloomington
Alexander Slaski: Indiana University Bloomington

The Review of International Organizations, 2022, vol. 17, issue 1, No 3, 63-87

Abstract: Abstract Governments frequently offer tax incentives to induce localized investments. This is puzzling because previous research finds tax incentives are rarely decisive factors in firms’ locational decision-making. Some argue incentives reflect hyper capital mobility, which strengthens multinational enterprises’ bargaining leverage vis-à-vis governments that wish to attract investment. Others emphasize the domestic political institutions and electoral considerations that incentivize politicians to publicly court investors. We argue that firms’ leverage over governments stems from investment characteristics associated with governments’ broader development objectives. We test our argument on deal-level data on investment incentives in Latin America from 2010 to 2017. Our results indicate firms are more likely to receive incentives when they are already embedded in local markets and when they exhibit characteristics associated with low ex post mobility. These results challenge widely held beliefs over what provides firms political power in an age of globalization, and suggest that governments use incentives primarily to fulfill their economic and political objectives rather than because globalization destroys states’ capacity to tax mobile capital.

Keywords: FDI; MNEs; Incentives; Capital Openness; Globalization (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11558-021-09418-0

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