|5.Regulatory<br>Heterogeneity|5. Economies of scale|5.Inter-governmental<br>cooperation<br>fostering<br>regulatoryconvergence through negotiation|
|---|---|---|

# **4.2.1 Information costs**

Seen from a Mode 3 perspective, information costs include obstacles that firms confront in finding optimal locations and developing sustained ties with competitive local suppliers. This may also include costs incurred in acquiring information about local market characteristics and tastes; information relating to land lease or purchases, compliance with domestic regulatory, tax and technical requirements; as well as regulatory risks and risk mitigation strategies.

Information asymmetries are pervasive in cross-border investment activity, a reality that has long been recognized by investment policy makers. In addressing such a market failure, an increasing number of host countries have established or expanded the substantive remit of investment promotion agencies, which among other functions, provide information services to investors considering investments in a particular host country.

As information asymmetries between host countries and potential foreign investors constitute a significant obstacle to cross-border investment activity, an important policy question is what aspiring FDI destinations can do to reduce such obstacles or their perception by would-be foreign investors? Harding and Javorcik (2011) collected data on 124 countries to examine the effects of investment promotion on FDI inflows. They tested whether sectors explicitly targeted by investment promotion agencies in their efforts to attract FDI received more investment in the post-targeting period, relative to the pre-targeting period and to non-targeted sectors. Their research offered conclusive evidence that investment promotion efforts decreased information asymmetries and led to higher FDI inflows to developing countries. No such link was found for industrialized countries, where relevant information was more readily available, leaving investment promotion agencies in these countries with a lesser role to play in this regard. Harding and Javorcik (2011) also found that, under certain circumstances, investment promotion efforts could be reasonably cost-effective.<sup>38</sup> While information asymmetries are seen as a relevant cost component that service suppliers confront when trading through Mode 3, no precise cost estimates exist to measure their importance relative to other pertinent Mode 3 trade cost components. However, as is explained in subsection 4.2, investor surveys do not tend to rank information gaps at the top of the most binding constraints affecting investment decisions. Today, specialized information services available on various mobile platforms and disseminated through specialized investment location advisory firms furnish investors (particularly larger ones with deeper pockets for advisory services) with significant amounts of pertinent data regarding potential locations and attendant regulatory requirements.

> 38 Harding and Javorcik (2011) found that a dollar spent on investment promotion leads to 189 dollars of FDI inflows. In other words, bringing a dollar of FDI inflows costs half a cent in investment promotion expenditures. An alternative approach leads us to conclude that an additional job created by a foreign affiliate requires 78 dollars in investment promotion spending.

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