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The Main Issue in Measuring FDI

In the article, "What We Talk About When We Talk About Foreign Direct Investment", Kerner (2014) dives into what Foreign Direct Investment (FDI) is and why FDI flows is the least accurate, yet most common, measurement. Kerner (2014) argues that a better FDI measurement is fixed capital expenditures because it does not discriminate against local and foreign investment, it gauges illiquid investments, and it highlights majority owned foreign affiliates that are not insulated from political risk. FDI fixed capital expenditures also supports the theory that democracy promotes FDI, whereas FDI flows and FDI stocks data displayed statistically insignificant results (Kerner, 2014). Kerner (2014) also claimed that FDI flows provides the best basis to define FDI, but the argument was presented that the real focus should be on studying multinational corporations versus FDI.

Three Policy Instruments that Impact FDI

Three forms of policy instruments that governments can leverage to influence FDI include financial incentives, creating stability, and host country policies.

1. Financial Incentives such as creating a tax haven can encourage FDI. For example, the Netherlands attracts FDI, in large part to its low tax rate (Kerner, 2014).
2. Political, Economic, and Legal stability encourages FDI because multinational corporations are more likely to choose a location with less political, economic, and legal risks (Hill & Hult, 2022). For example, a multinational corporation might select a location because it offers low wages, a highly skilled workforce, and strong enforcement of intellectual property rights.
3. Host Country Policies can either attract or discourage FDI through country policies. For example, some countries will provide tax breaks, subsidies, or other incentives to encourage FDI. The U.S. did this with the Taiwan FDI in the Arizona microchip plant (Sainato, 2023). A host country can also discourage FDI with restrictive policies.

An Analysis of Kerner's Research in the Quest for a Standard Methodology to Measure and Report FDI

Kerner's research defines FDI and sets a foundation for both financial FDI and commercial FDI concepts. Kerner (2014) also analyzes three distinct methods of measuring FDI: FDI flows, FDI stocks, and FDI fixed capital expenditures. I do not believe Kerner provides sufficient evidence for a standard methodology for measuring and reporting FDI. Kerner (2014) argues that FDI flows illustrate a macroeconomic phenomenon that differs from most political science theories and across political environments, which can cause bias in the results of the FDI flow data measurement of border-crossing capital movements. Kerner also argues that FDI flow data does not accurately account for FDI commercial actions. For example, a multinational corporation may be more inclined to use local credit markets to finance operations; this would result in zero FDI flows. Kerner's research does more to support multiple avenues for FDI measurements across multiple scenarios than to promote a standard methodology. Although Kerner suggests that an FDI measurement based on fixed capital expenditures is more accurate than FDI Flows or FDI stocks data, Kerner does not develop how this measurement would become a world-wide standard.