What Makes an Investment Promotion Agency Effective ? Findings from a Structural Gravity Model

Victor Steenbergen

No 10276, Policy Research Working Paper Series from The World Bank

Abstract: Although many countries have established investment promotion agencies over the past two decades, there is little evidence on what characteristics make them effective in attracting foreign direct investment into their home country. To provide new insight into this question, this paper brings together sectoral foreign direct investment data with survey data on investment promotion agency characteristics. Using a structural gravity model framework, it explores the effect of investment promotion agencies’ sectoral targeting on inward foreign direct investment stocks over 2013 to 2018, across a sample of 36 middle- and high-income countries. The study finds that investment promotion agency sectoral targeting provides a significant positive effect on the sector’s foreign direct investment stock in that country. Yet, a gravity model with country-interaction effects suggests that not all countries are equally effective at promoting investment. The results from the model are used to define two groups: high-performing investment promotion agencies (those with positive, significant effects in attracting foreign direct investment) and other investment promotion agencies (those with insignificant or negative significant effects). Using t-tests, the study considers which investment promotion agency characteristics significantly differ between the two groups. The findings suggest that effective investment promotion agencies are more likely to be private or semi-private agencies. Their mandate tends to be focused narrowly on foreign investment and exclude responsibilities for domestic investment promotion. Such investment promotion agencies are more likely to have a board of directors, and their staff tends to be better compensated. Finally, high-performing investment promotion agencies tend to provide more investor services, partly by engaging smart, sectoral analytics and adopting systems for identifying investor complaints or disputes.

Date: 2023-01-13
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