INVESTMENT-PROMOTION POLICIES AND EMPLOYMENT BY FOREIGN FIRMS IN THE US STATES

Abstract

This study examines the relationship between state-level attributes and employment outcomes of US inbound Foreign Direct Investment (FDI). In particular, I investigate how investment-promotion policies influence the employment of workers in the US by foreign-owned manufacturing firms (FDI-related employment, hereafter). As discussed in the first two dissertation chapters, there are critical shortcomings and gaps in the existing literature. My research addresses these gaps. In so doing, the implications are of interest to researchers and policy makers regarding the strategic use of business incentives to promote US employment.

Chapter 3 analyzes the effectiveness of US investment-promotion policies aimed at attracting FDI. It begins by reviewing four principal business incentives offered by state governments: favorable corporate income taxation, non-tax financial support, the provision of Foreign-Trade Zones (FTZs), and the establishment of trade offices abroad. Using data from 50 states between 1999 and 2008, I employ a two-way fixed effects panel data framework and a dynamic system GMM approach to address the dynamic features of employment outcomes. I also correct for potential measurement errors and potential endogeneity of policy variables. The results suggest that state business incentives such as providing more FTZs (both general-purpose and subzones), spending more on public services even with higher corporate income taxes, and holding overseas offices in particular countries, have statistically significant effects on FDI-related employment in the US.

Chapter 4 builds on Chapter 3 by exploring the potential heterogeneous response to state investment-promotion policies. Because state-level FDI-related employment does not follow a normal distribution, the conditional mean effects generated by standard least squares estimates may be unreliable. Accordingly, I employ a simultaneous quantile regression approach to reveal the relative importance of each policy at various locations of the employment distribution. I empirically investigate the employment by foreign-owned manufacturing firms aggregated to the state level for 50 US states between 1997 and 2008. The results suggest that the estimated effects of a better transport infrastructure, the provision of FTZs, the count of offices abroad and the selection of office-host countries, vary significantly across the FDI-related employment distribution. Therefore, unequal employment benefits of attracting FDI could be expected between states, as well as more interest in FDI for some states than for others.

Chapter 5 introduces a third line of inquiry that draws from industrial organization. It offers a novel application of FDI location choices within the context of a dynamic market structure. The recent development in empirical studies of firm entry/exit behavior fully takes advantage of the aggregate-level information. For instance, Pakes, Ostrovsky and Berry (POB, 2007) model the number of firms as endogenous because it is determined by firms' entry/exit decisions. Given that firms' choices of entry/exit depend upon their continuation value and entry value, the key step is to estimate the incumbents' (potential entrants') perceived transition probabilities across states of the market. This methodology provides a framework for analyzing how state-level attributes (particularly business incentives) affect foreign firms' entry costs and fixed costs, and further impact foreign firms' entry/exit decisions in the US. I outline in this proposal how to apply the POB (2007) methodology to the study of FDI location choice decisions within the US retail industry.