world bank the effectiveness of promotion agencies at attracting foreign direct investment phần 3

Are Investment Promotion Agencies Effective? / 11

most easily attracted by large markets.7 In our attempt to select

explanatory variables, we also considered other factors, in partic￾ular infrastructure and education variables, as well as regional

dummies, but those added only limited and inconsistent explana￾tory power.

Our empirical work is designed to understand whether invest￾ment promotion adds to the ability of the above variables to

explain FDI flows. Our approach is discussed in detail in the

technical appendix to this chapter, but two points are important.

First, our approach is cross-sectional. It examines the relation￾ships between promotion effort and FDI inflows at one point,

specifically in the year 2001. We cannot measure changes in flows

over time because we do not have the necessary data. The

absence of time dimension in our analysis is, of course, restric￾tive, but it may be not as much as one might presume because of

the stability of IPA budgets over time (box 2.3).

Box 2.3 The Stability of IPA Budgets over Three- to Five-Year Periods

Our approach examines to what extent differences in the promotion

effort are associated with FDI flows across countries, adjusting for

other factors. The data availability forces us to use FDI and IPA budg￾et for the same year, but ideally one should expect a lag between

these two variables.Wells and Wint (2001) suggest a lag of two to five

years. In other words, the ideal test would link IPA budget for the

years 1997–99 with FDI flows in 2001.

By using IPA budgets and contemporaneous FDI flows across

countries, we assume that the IPA budgets have not significantly

changed between 1997–99 and 2001. This assumption is reasonable

for the large majority of countries included in our sample. All IPAs

(expect for four) existed in 1998. Hence, we may assume that they

already had access to the same sources of financing as in 2001,

because most funding comes from government (and sometimes

from donors), which has a relatively slow adjustment cycle in its

budgetary allocation.