New research shows that investment promotion agencies (IPAs) are having a strong positive impact on foreign direct investment (FDI) flows in Europe, and have been essential to levelling up less-developed regions.

A report titled FDI inflows in Europe: Does investment promotion work? argues that FDI is influenced by IPAs even in advanced economies, and that IPAs focused on less-developed regions increased FDI flows by up to 71%.

The report was written by Riccardo Crescenzi of the London School of Economics and Political Science, Marco Di Cataldo of Ca’ Foscari University of Venice, and Mara Giua of Roma Tre University. Their research was based on surveys of national and sub-national IPAs in Europe while applying policy valuation methods to estimate the impacts of IPAs on FDI attraction

In their analysis, sub-national IPAs contribute to increasing inflows of foreign investment “at the extensive margin – i.e. raising the probability of receiving FDI – and at the intensive margin – boosting the amount of total foreign investment received as well as jobs directly created by the investment”. 

Their research shows that sub-national IPAs working in close proximity to investors are particularly successful at attracting FDI to areas “where market and institutional failures are stronger”. 

IPAs in Europe influence FDI “over and above other policies targeting the general economic improvement of the host economies”, the report states, in particular in knowledge-intensive sectors “where collaborative systemic conditions are more relevant”. 

The report also shows that “smaller ‘occasional’ investors” are more likely to benefit from the services IPAs provide, while investors from within the EU Single Market benefit as much from IPAs as non-EU investors, supporting the idea “that even after removing most informational and legal barriers to capital mobility, localised market (e.g. for suppliers or suitably trained workers) and institutional failures remain a binding constraint successfully addressed by regional IPAs”. 

The paper suggests that having dedicated IPAs in less-developed regions “may be a viable policy option to improve their attractiveness to foreign investors, and, possibly, to stimulate their economic development”. 

The report findings suggest that the investment attractiveness of less-advanced economies is “conditioned not only upon their capacity to address information asymmetries in capital markets but also on the implementation of appropriate actions to address localised market and institutional failures”.