What Makes an Investment Promotion Agency Effective ? Findings from a StructuralGravity Model

Although many countries have established investment promotion agencies over the past twodecades, there is little evidence on what characteristics make them effective in attracting foreign direct investmentinto their home country. To provide new insight into this question, this paper brings together sectoral foreign directinvestment data with survey data on investment promotion agency characteristics. Using a structural gravity modelframework, it explores the effect of investment promotion agencies’ sectoral targeting on inward foreign directinvestment stocks over 2013 to 2018, across a sample of 36 middle- and high-income countries. The study finds thatinvestment promotion agency sectoral targeting provides a significant positive effect on the sector’s foreign directinvestment stock in that country. Yet, a gravity model with country-interaction effects suggests that not all countriesare equally effective at promoting investment. The results from the model are used to define two groups:high-performing investment promotion agencies (those with positive, significant effects in attracting foreign directinvestment) and other investment promotion agencies (those with insignificant or negative significant effects). Usingt-tests, the study considers which investment promotion agency characteristics significantly differ between the twogroups. The findings suggest that effective investment promotion agencies are more likely to be private orsemi-private agencies. Their mandate tends to be focused narrowly on foreign investment and exclude responsibilitiesfor domestic investment promotion. Such investment promotion agencies are more likely to have a board of directors, andtheir staff tends to be better compensated. Finally, high-performing investment promotion agencies tend toprovide more investor services, partly by engaging smart, sectoral analytics and adopting systems for identifyinginvestor complaints or disputes.