Public Procurement and Foreign Direct Investment across France, Germany, Italy and the UK

By Mardas, Dimitri; Papachristou, George et al. | Atlantic Economic Journal, June 2008 | Go to article overview

Public Procurement and Foreign Direct Investment across France, Germany, Italy and the UK


Mardas, Dimitri, Papachristou, George, Varsakelis, Nikos C., Atlantic Economic Journal


Introduction

During the last two decades foreign direct investment (FDI) has become an important factor of economic development in host economies by bolstering the quality of local workforce and entrepreneurship, by contributing to the diffusion of technology, by creating positive externalities, and by alleviating capital shortage. Attracting and sustaining FDI inflows has become a policy objective in its own right while policies in other fields have been reshaped to accommodate the new objective. This paper examines the way public procurement policies in the host state interfere with FDI inflows. In other words, it analyzes public procurement as a determinant of FDI.

Recent research on FDI and its determinants has mainly focused on market size (Barrell and Pain 1999a; Bengoa and Sanchez-Robles 2003; Bevan and Estrin 2004; Trevino and Mixon 2004), relative unit labor cost (Barrell and Pain 1999b; Bevan and Estrin 2004; Farrell et al. 2004) and political and economic risk, especially in developing host countries (Bengoa and Sanchez-Robles 2003; Trevino and Mixon 2004). Furthermore, a number of studies suggest that wherever non-tariff barriers such as antidumping replaced tariffs, FDI regained its "tariff-jumping" role (Belderbos 1997; Blonigen and Feenstra 1997; Barrell and Pain 1999b; Bloningen 2002; Farrell et al. 2004).

It has furthermore been established that location, being a strategic variable of corporate policy, is also a major determinant of FDI (Barrell and Pain 1999a). External economies to location may be either due to local comparative advantage or to a targeted industrial policy, an important element of which is public procurement. In fact, public procurement may be used as a tool of discrimination in favor of local firms and "buy national" policies may operate as a non-tariff barrier for foreign suppliers of final goods. On the other hand, government contracts constitute an essential and privileged instrument towards supporting domestic suppliers, promoting production innovation and assisting cost reducing efforts (Laffont and Tirole 1986, 1990); their effectiveness however may be questioned (Miyagiwa 1991). Through their public procurement policies, governments may also pursue a wider set of objectives such as sectoral, regional, and social development (Laffont and Tirole 1991; Vagstad 1995; Geroski 1990).

In this paper a cross-country and cross-industry sample is analyzed in order to assess whether public procurement policies and agglomeration economies are statistically significant determinants of FDI. The sample consists of industry data spanning 30 sectors within France, Germany, Italy, and the UK for 1991, that is 2 years prior to the enactment of the Single European Market (1993). After accounting for labor productivity and trade openness, we find that FDI is significantly affected by both public procurement policies and agglomeration economies. These findings have important policy implications both on the corporate and the national level. Governments could attract foreign investment in specific industries either by adopting a "buy national" policy or by creating agglomeration economies.

The rest of the paper is organized as follows. In the first section we present the stylized facts of public procurement in the EU. In the second section we set forth the theoretical underpinnings and the hypotheses under investigation, whereas data and estimations are presented in the third section. We discuss policy implications in the fourth section and epitomize our analysis in a final section.

Public Procurement Regulation in the European Union

Early European Community (EC) Directives for the opening up of public procurement date back to the 1970s (first Works Directive 1971/305 and first Supplies Directive 1977/62). It must be noted that import penetration to public procurement markets at that time was unimportant (1.5% on average), although public procurement on supplies, works and services represented a 15% to 18% of EC GDP (Atkins 1988). …

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