How Effective are IPA's in Attracting more FDI?

This master thesis investigates the impact of a host country’s investment promotion agency (IPA) on foreign direct investment (FDI) inflows. The theory suggests that investment promotion is one of the pull factors that influences a potential investor’s decision process, but still the most important FDI determinant is the host country’s investment climate. Empirical findings of this theory are, however, mixed. In this thesis, we employ the approach pioneered by Sung Hoon Lim (2008) to shed more light on this issue. The empirical analysis carried out in this thesis to test the theory, employed aggregate and country-sector disaggregate level data for the 27 European Union countries over the 1997-2012 period, confirms the theoretical predictions made. In particular, it is shown that partial mediation between IPAs and FDI inflows exists. A host country’s IPA has an indirect, but positive and significant affect in acquiring more FDI greenfield projects in the EU27. While a host country’s business environment has a direct effect on FDI inflows in the EU27, which is enhanced by the existence of an IPA. In this regard, it might be said that still the fundamental determinant for the potential investor is a host country’s business environment and it cannot be replaced by the existence of an IPA. Since it was proven that a host country’s IPA still has an indirect effect on FDI inflows, it could be said that positive improvements in the quality of IPAs, defined as website quality, inquiry handling quality and total quality, are expected to lead to attracting a greater number of FDI projects.