Quality over Quantity: Transparency and the Attraction of FDI Projects

• In Event: FDI and Domestic Politics

Abstract

This paper examines the impact of transparency on attracting foreign direct investment (FDI) projects, proposing that transparency, particularly through daily newspapers, encourages politicians to focus on quality over quantity in FDI attraction. This form of transparency enables voters to more accurately evaluate the quality of FDI projects, with a preference for those likely to enhance community living standards. Politicians, cognizant of re-election prospects and possible voter backlash, thus align their decisions with voter preferences, favoring high-quality FDI projects for investment incentives. I hypothesize that in counties with daily newspapers, high-quality FDI projects are more likely to receive incentives. Consequently, transparency may not increase the total number of FDI projects in a constituency, but it can lead to a higher-quality FDI project portfolio.

The research employs a dual empirical approach, utilizing US FDI and investment incentive data from 2010 to 2019. The first section analyzes project-level data of all US greenfield FDI projects, revealing that higher project quality significantly boosts the chance of securing an incentive deal, especially in counties with daily newspapers. The second part aggregates project-level data to a county-level cross-section. Employing entropy and covariate balance propensity score weighting methods, the study demonstrates that the presence of daily newspapers in a county markedly raises the median quality of FDI projects attracted to that county. Simultaneously, newspapers seem to decrease the overall influx of FDI projects, indicating a political shift from quantity-focused to quality-focused FDI due to media scrutiny.

This paper enriches the understanding of transparency's role in FDI inflows, challenging prevailing perspectives on globalization's influence on investment incentives. It underscores the critical role of domestic politics and media in shaping economic policies.

Author

• Stefano Jud, University of Bern