Foreign direct investment in competing host countries : a study of taxation and nationalization

Abstract: Capital-importing countries face a trade-off between the need to attract new investment and the desire to extract gains from investment already obtained. This dissertation analyses the developing countries’ taxation and nationalization of direct investment from the late 1960s and onwards. In contrast to previous work, it is considered that the developing countries compete with each other in their interaction with multinational enterprises.Using sequential bargaining games, two theoretical chapters determine the distribution of gains from direct investment through taxation and nationalization. One chapter adds external effects on the environment, casting light on when and why host countries may accept pollution as a price for obtaining direct investment. Finally, model based tests explain which countries nationalized in the 1970s, and why the nationalization policy was largely discounted in the late 1970s.The study suggests that host country policies which manipulate the behavour of multinational enterprises do not normally prevent direct investment from being undertaken, or distort the pattern of investment. Policies which interfere with ownership, on the other hand, may prevent and distort direct investment. Two states may be distinguished. The first, in which many countries nationalize, applies to the early 1970s. The second, in which few countries nationalize, has prevailed from the late 1970s.The findings of the study yield certain policy implications. The risk of a wide spread return to nationalization subsequent to an investment revival may not be curbed by the Multilateral Investment Guarantee Agency (MIGA), established as a member of the World Bank Group in 1988. A solution is likely to require measures that alleviate the developing countries’ acute scarcity of foreign exchange.