The last decade has witnessed a dramatic change in attitude towards foreign direct investment (FDI) and significantly increased competition between governments to attract FDI as a result.1 Globalization, and especially the removal of national barriers to capital flows, has lead to a tremendous surge in foreign direct investment which reached a record high of almost US$1.3 trillion in 2000 — representing a growth rate of 18 percent, which is higher than those of any other global economic indicators including world production, trade or capital formation.2 This development has had a significant impact not only on economic processes but also on government policies aimed at attracting FDI. While still only a few Western countries would acknowledge investment promotion as an economic policy goal per se, all of them have set up specific policies and institutions that are aimed at attracting and regulating investment flows.3 The latter is easy to understand given that the overall distribution of FDI remains highly skewed — only 30 host countries in total account for about 95 percent of all FDI inflows, and less than 30 home countries account for 99 percent of all outward investment flows in 20024 — and competition is fierce.


Foreign Direct Investment Foreign Direct Investment Inflow Accession Country Outward Investment Foreign Direct Investment Project 
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    See OATES (1972), p. 143: “The result of tax competition may well be a tendency towards less than efficient levels of output of local services. In an attempt to keep taxes low to attract business investment, local officials may hold spending below those levels for which marginal benefits equal marginal costs [...].”Google Scholar
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    In Europe, where subsidies to foreign companies have been know to reach up to fifty percent of the value of the FDI project, the European Commission has recently started to investigate and demand repayment of illegal state aid. Unhappy with local bidding wars, it recently slashed the proposed EUR41.7 million for a General Motors investment in Portugal, raising doubts about the cost-benefit analysis of locating to an alternative location in Poland. Similarly, the EU Commission decided to cut the proposed EUR418 million grant for BMW’s EUR1.2 billion investment in Leipzig by EUR55 million after evaluating the cost benefit structure of alternative sites (see PIGGOTT, 2003).Google Scholar
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