Agglomeration, Adjustment, and State Policies in the Location of Foreign Direct Investment in the United States

Abstract

Using U.S. state-level data we show that agglomeration externalities influence the level of foreign-invested capital in a location. Our empirical model allows the separation of agglomeration effects from the rate of capital stock adjustment, two forces that previous research has conflated. We estimate an agglomeration elasticity of investment of 0.11 to 0.15 with respect to same-source-country investment, lower than previous estimates. We also investigate the influence of state policies and find that although general investment incentives do not affect the location of FDI, targeted policies such as unitary taxation and state foreign offices influence investment. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.