Shifting Advantages: Do Subsidies Shape Cross-Border Investment

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Industrial policies have been on the rise with subsidies provided to firms accounting for the lion's share of interventions. The effects of these measures on productivity, trade, investment and other economic and non-economic variables are largely an open question. This paper examines empirically the link between subsidies and inward cross-border investment using data on greenfield investments across a large sample of advanced and emerging economies between 2010 and 2020. Employing a difference-in-difference approach, we find that-while the average effect of all subsidies is zero-financial subsidies, such as loans and loan guarantees, increase new cross-border investment projects by an average of 7%. These effects are primarily driven by capital-intensive sectors in capital-abundant countries, suggesting that subsidies can affect foreign direct investment-but they reinforce (rather than reshape) countries' comparative advantage.

Subject: Balance of payments, Capital productivity, Comparative advantage, Foreign direct investment, Human capital, International trade, Labor, Production

Keywords: Capital productivity, Comparative advantage, Foreign direct investment, Foreign Direct Investment, Global, Human capital, Industrial Policy, Subsidies