# **1. Introduction**

Investment promotion agencies (IPAs) stand out as one of the most favored policies by countries to attract foreign direct investment (FDI). Between 2002 and 2018, the number of national and subnational IPAs registered in the World Association of Investment Promotion Agencies (WAIPA) grew from 112 to 170 (Heilbron and Kronfol, 2020). These IPAs also receive considerable public funding. A survey of IPAs in Latin America and the OECD found the median IPA in these countries manages a budget of US$7 million, has 100 employees, and performs roughly 40 different promotional activities. Resources available to IPAs in certain countries can exceed US$200 million and 1,000 employees (Volpe Martincus and Sztajerowska, 2019).

Despite the proliferation of IPAs in the last two decades, their impact on stimulating economic development has varied considerably across countries. On average, IPA activity is often associated with greater FDI inflows in targeted sectors (see for example Charlton and Davis, 2007; Harding and Javorcik, 2011). High-profile cases have further illustrated the influence that investment promotion can have in attracting FDI and shaping economic development, as shown in the cases of Malaysia, Costa Rica and Morocco (Freund and Moran, 2017). Yet, in many other developing countries, IPAs have failed to replicate these examples and have made little impact in attracting FDI (Heilbron and Kronfol, 2020).

To better understand what drives these differences in IPA performance, this paper brings together new data on sectoral FDI and IPA characteristics. It uses this to construct a structural gravity model framework with country-interaction effects that evaluates the effectiveness of each country IPA’s sectoral targeting on their FDI stock in that sector. Results from this model are then used to define two groups: highperforming IPAs (those with positive, significant effects in attracting FDI) and other IPAs (those with insignificant or negative, significant effects). It then considers which IPA characteristics significantly differ between the two groups, and in turn, reflects on what type of institutional setting, strategic focus, organizational framework and service provision is most conducive for IPAs to attract FDI.

## **Outline**

Section 2 of this report reviews the literature. It first considers the broader literature on the effect of IPAs in attracting foreign investment. It then also considers the potential that gravity models hold for the analysis of FDI dynamics. To identify the characteristics that may shape the functioning of IPAs we build on the qualitative literature reviewed by Heilbron and Kronfol (2020) and consider four broad pillars: institutional arrangement; strategic alignment and focus; organizational framework and resourcing; and investor service delivery. Section 3 provides a summary of the data used in this analysis. This describes the process for harmonizing different types of sectoral FDI, and merging this to the WB-WAIPA survey on IPA characteristics. Section 4 summarizes the empirical strategy, which includes the structural gravity model of FDI and the gravity model with country-interaction effects. Section 5 provides the results, and Section 6 concludes.

## **Added value of this paper**

This paper provides a modest contribution to two distinct bodies of literature. The first relates to economic literature analyzing the impact of IPA to attract FDI. These studies commonly rely on an IPA’s specific sectoral targeting strategy combined with sectoral FDI data. Yet, because sectoral FDI is often not available for most countries, researchers either restrict their analysis to FDI inflows from the United States 2