The Role of Investment Incentives in Regional FDI Reallocation:
A Regression-Discontinuity Approach, CERGE-EI Working Paper 438, 2011
This paper analyzes the causal effect of investment incentives on regional allocation of foreign direct investment (FDI) in the
Czech Republic during 2001-2007. Investment incentives institutional setup provided foreign investors with financial incentives
depending on the particular district unemployment rate. The identification strategy is based on a regression-discontinuity
approach as the scheme design introduces three unemployment thresholds differentiating the amount of the subsidy. The results
indicate a positive effect of the investment scheme, but this impact is concentrated only at the lowest available unemployment
threshold, increasing annual FDI inflow per capita by 330 euros compared to districts ineligible for the subsidy. However, an
impact at higher unemployment thresholds is not found. Attracting FDI into the most distressed regions needs to be complemented
with other policy tools and remains to be an important challenge for policymakers. Among other FDI location factors, the share
of tertiary educated labor force and wages have significant positive impact on FDI, albeit only during 2001-2004, increasing
annual FDI inflow per capita by 25 and 12 euros, respectively.
The Impact of Territorially Concentrated FDI on Local Labor Markets: Evidence from the Czech Republic
(with Daniel Munich),
Labour Economics, 17, pp. 354-367, 2009.
This paper investigates the impact of a large and territorially concentrated foreign direct investment (FDI) inflow on local labor market outcomes in the Czech Republic. A conditional difference-in-differences technique is employed for an estimation of the impact and block bootstrapping is used for computing consistent standard errors. The results indicate a positive and statistically as well as economically significant effect of a large investment project on the local unemployment outflow rate, which is driven mainly by increases in the aggregate unemployment exit hazard rates for unemployment durations smaller than nine months. Subsequent to the investment, the unemployment rate decreased by 1.7 percentage points and the employment rate increased by 3.7 percentage points in the host district. However, the impact on long-term unemployed was negligible as the exit hazard rates for durations longer than nine months remain unchanged. Moreover, a simple cost-benefit analysis suggests that investment incentives paid from a state budget would pay off only in a horizon of twelve years.