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A national authority wishes to attract foreign direct investment (FDI) to create local jobs. We analyse the optimal national trade policy when local authorities might offer subsidies to convince a multinational enterprise (MNE) to invest in their jurisdiction. With centralised decision-making or with allocation of investment to particular localities, the central authority's optimal policy is to use a high tariff to avoid payment of any subsidy to the MNE. Despite this, some socially undesirable (but locally desirable) FDI cannot be avoided. If local authorities compete to offer subsidies to attract local investment, then the central government's optimal policy is to try to discourage FDI by choosing a low tariff. Despite this, some socially undesirable-and even locally undesirable-FDI prevails. We conduct our analysis both assuming an upper bound on tariffs, as would be consistent with trade liberalisation, and allowing tariffs to vary freely. The effect of increasing trade liberalisation depends heavily on the system of granting local subsidies: if the system is centralised, trade liberalisation decreases the range of parameters for which FDI occurs; if the system is decentralised and competitive, it increases this range.

Investments in the North by Southern firms are still unusual. While such investments may be motivated by tariff jumping and internalization, casual empiricism suggests that such reverse DFI may be motivated by improved technology access. This paper examines, within a theoretical framework, whether enhanced technology access provides sufficient motivation for the endogenous formation of southern multinationals. Southern firms are most likely to establish northern subsidiaries in industries with rapid technological obsolescence; when global sales are high relative to DFI costs; and when domestic production costs are high. Neither market power nor significant market shares are a prerequisite for southern multinationals.

In choosing where to invest, firms seek out information on a set of possible locations. Information asymmetries may make country visibility particularly important in decisions to locate investment abroad. We develop a country visibility index based on international news stories in The Economist, and show that broad country visibility is at least as important in attracting foreign direct investment (FDI) as other specific investment promotion activities or proxies for information frictions. Controlling for standard gravity model determinants of FDI, we find that greater visibility of developing countries, in particular lower middle-and low-income countries, increases the investment that they receive from US multinational corporations. The good news is that transparency can work. When information is relevant, standardised and public, it fosters intelligent decision-making.

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