Local Economic Effects of Foreign Direct Investment

• In Event: Local Effects of Trade and Foreign Investment Entry

Abstract

Governments worldwide aim to attract FDI to generate growth by increasing host countries’ capital stocks. Yet, empirical evidence shows no clear growth-effect of FDI. Research is similarly divided over whether FDI increases or decreases inequality. We argue that this is due to the fact that research has failed to investigate the consequences of FDI on the local level. Relying on country-level aggregates both discounts FDI’s geographically concentrated bene-fits and neglects that some areas in host countries are simply much more likely to receive FDI. We obtained geo-located data on 185,000 FDI projects around the globe to estimate the local economic effects of FDI from 2003-2018. We combine these with nightlight data in a 20km radius around each project, calculating both the difference in average light intensity, a measure for growth, and the distribution of light intensity, a measure for inequality. To mitigate endogeneity problems, we rely on a difference-in-difference estimator where we compare the effect of FDI on growth and inequality between areas that have already received FDI in a given year and areas that have not yet received FDI. We find that FDI increases both economic growth and inequality; an effect that is stronger in autocracies than democracies.

Authors

• Luca Elias Messerschmidt, TUM School of Governance

• Tabea Palmtag

• Tobias Rommel, Technical University of Munich