Policy and non-policy determinants of US equity foreign direct investment

Abstract. This study examined the effects of policy and non-policy variables on the location of new U.S. direct investment abroad (as distinct from reinvested earnings of existing affiliates), using 1977 and 1982 Benchmark data. The data revealed statistically significant effects for investment incentives (positive), performance require-ments (negative), and host country effective tax rates (negative) with interesting differences between the two time periods and between developed versus developing countries. Significance was also found for non-policy variables such as political stability, cultural distance, GDP per capita, and infrastructure. Determinants of the location of foreign direct investment have proven to be an elusive target for empirical research. A major problem is the operationalization of the policy variables. By its very nature, the incidence of policy variables is hard to capture. One of the early empirical studies in this area by Root and Ahmed [1978] used the statutory corporate tax rate as a proxy for the effects of all fisca