Using public policy instruments to attract foreign direct investment (FDI) has become standard in most countries, irrespective
of their level of development, geographical location or industrial structure. Against this background the paper analyses the
suitability of various public policies to attract inward FDI based on a sample of 11 countries and 10 industries from the
manufacturing sector over 10 years. For this aim we derive an empirical baseline model of the determinants of inward FDI stock.
From this baseline model FDI gaps – measured as the difference between the "estimated actual" inward FDI stock and the "potential"
FDI stock, which could be realized if a certain "best practice policy" were carried out – are derived. Thereby the analysis
focuses on business taxation, public research and development expenditures, the information and communication infrastructure
endowment, labor costs as well as institutional and skill-related policies. The analysis inter alia reveals the share of each
of these location factors in the total industry- and country-level FDI gap. Moreover, the analysis explores how policy advice
depends on the definition of the "best practice policy".
Keywords:Economic policy, Foreign direct investment, European Union, Industry-level study, Location decision
Research group:Industrial, Innovation and International Economics