The impact of host country government policy on US multinational investment decisions

Foreign direct investment (FDI) is playing an increasing role in the world economy. One-half of all trade and one-fifth of world GDP are attributable to multinational corporations (Rugman, 1988). The sales of firms affiliated with US-based multinationals are over twice the size of US exports. Exports from US-based firms to affiliates abroad accounted for approximately one-third of total US exports. In addition, despite the large share of US exports accounted for by multinational corporations, sales of goods in foreign countries by majority-owned foreign affiliates of US firms are over five times the size of US exports by multinationals (US Department of Commerce, 1995). In addition, the importance of investment of multinationals to a country's growth or productivity is being scrutinised. Some researchers have found that FDI is more important to a country's growth than domestic investment since investment by multinationals includes improved technology (Borensztein, de-Gregorio and Lee, 1995; and Blomstrom, Lipsey and Zejan, 1992). Others, however, have found that there are no productivity differences between foreign and domestic firms (Globerman et al., 1994). Given the importance of FDI, the impact of government trade and investment policy on FDI is an important policy issue. Trade liberalisation or openness is sometimes accompanied by a decrease in restrictions on foreign investment. In addition, trade and FDI may be substitutes or complements in serving local markets. Because of these two tendencies, it is useful to consider these two issues jointly. Do more open countries, in terms of trade and FDI policy, attract more investment? Before reviewing and extending the evidence on the relationship between FDI and government policy, it is useful to examine the trends in the amount of US-owned or controlled assets.