The Amazing Race to the Bottom: How the European Union and the United States Use Investment Incentives to Lure Inward Investment

Abstract

The European Union (EU) and the United States offer a multitude of investment incentives to attract inward investment. In the United States alone, business incentive usage increased from 46 to 78 billion dollars between 2007 and 2013. Investment promotion incentives help achieve economic development goals, such as creating jobs and fostering technology spillovers, yet they run the risk of inciting bidding wars among parties seeking investment. This thesis asks, under what circumstances does a race to the bottom occur when governments compete to offer incentives? To answer this question, this thesis develops an analytical framework that uncovers how three factors – 1) sector-dependent firm-level priorities, 2) domestic politics and 3) institutional regulations—indeed intensify competition for investment. First, this work finds that sectors shape firm-level priorities and that firms in more mobile industries are more responsive to investment incentive packages. Second, competition to attract investments is intensified by domestic political factors, such as electoral pandering, especially in the United States. Finally, some regulations, such as those concerning residency and citizenship rights, can be used by competing countries to attract investment, as is currently the case in several EU Member States. Drawing from interviews, empirical and theoretical literature, non-governmental organization reports, news sources and investment promotion materials, this thesis conducts a qualitative analysis, via case studies, of the nature of subnational investment promotion in the United States and the European Union. Building on the extensive race to the bottom theoretical literature, this work contributes a more nuanced investment promotion perspective, incorporating insights from recent American and European investment deals. The findings have implications for developing and developed countries alike, which spend exorbitant amounts of taxpayer money each year to attract investment. Adverse consequences often arise, such as wastefully subsidizing companies that would have chosen a location regardless of incentives, failure to meet job creation targets, and cheapening the definition of citizenship. This thesis concludes with policy implications for more coordinated and sustainable investment promotion for policy makers and investment promotion agency representatives around the world.