Advancing Public Entrepreneurship through State Government Capacity and Competitiveness: The Impact of Discretionary Fiscal Policy of American States on Worldwide Manufacturing Industries

• Author: Geiguen Shin
• DOI: http://doi.org/10.1177/02750740221148188
• Published date: 01 February 2023
• Date: 01 February 2023
• Subject Matter: Articles

Advancing Public Entrepreneurship

through State Government Capacity

and Competitiveness: The Impact of

Discretionary Fiscal Policy of American

States on Worldwide Manufacturing

Industries

Geiguen Shin

1

Abstract

Many policymakers and administrators have directed efforts to increase foreign manufacturing investment (FMI) due to its

potential to raise the employment rate, technological progress, and productivity in their regions. Despite foreign manufactur-

ers’signif‌icant inf‌luence on the economies of their host countries, institutional and policy uncertainty creates signif‌ican t entry

barriers for multinational manufacturers. Focusing solely on American state performance in economic development as mea-

sured by amounts of FMI, this study suggests that different institutional designs and regulations that affect state taxing and

spending decision-making make a difference in FMI in American states. This research empirically assesses the relationship

between f‌iscal federalism and FMI by focusing on the level of f‌iscal decentralization, federal grants, and f‌iscally constraining

institutions. Testing two different FMI datasets that cover all 50 American states by source country between 1987–2006

and 2008–2016, this study f‌inds that manufacturing f‌irms increase their investment in the states that exercise higher discretion

in managing f‌iscal policy, receive more federal grants, and implement more restrictive taxing and spending regulations. The

observed positive impact of f‌iscal institutions and constraints is more prominent for foreign manufacturing f‌irms in the

tax-exemption group.

Keywords

state government performance, foreign manufacturing investment, f‌iscal decentralization, f‌iscal institutions, tax limit,

supermajority rule, institutional stability

Administrators and policymakers are evaluated by performance

in terms of policy outcomes. Research on both public manage-

ment and policy implementation has accounted for government

performance largely as a function of potential management

quality (Boyne, 2003) or external environments to the agency

and resources (Boyne et al., 2005). While these studies have pro-

vided critical information that can be translated into evidence-

based advice for policy practitioners regarding how to improve

government policy performance, there remains insuff‌icient evi-

dence of sizable factors inf‌luencing government performance.

The reality is that policymakers are almost always constrained

by statutory factors that limit management activities or policy

implementation (Heckman, 2013). A good example is govern-

ment performance in economies. Despite scholars’efforts to

predict both short- and long-term economic growth, forecasting

regional growth has been challenging because state and local

governments exercise different levels of regulations that yield

different results for production costs, technological advances,

and outputs (Tannenwald, 1997).

Functional theory of American federalism suggests that the

functional eff‌iciency of government management increases

when each level of government manages policies—that is,

the federal government manages redistributive policies and

state and local governments manage economic development

policies—that can best perform (Peterson, 1995; Shin, 2019).

Considering that states have traditionally made major efforts

to increase economic performance by competing with one

another, the economic performance of a state government can

1

Kookmin University, Seoul, South Korea

Corresponding Author:

Geiguen Shin, Kookmin University, 77 Jeongneung-ro, Seongbuk-gu, Seoul

02707, South Korea.

Email: geiguen@gmail.com

Article

American Review of Public Administration

2023, Vol. 53(2) 64–81

© The Author(s) 2023

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/02750740221148188

journals.sagepub.com/home/arp

be measured, in part, by its capacity to attract more industries

and businesses to its jurisdiction to raise employment rates

and improve productivity. Noting that multinational corpora-

tions have signif‌icantly increased regional economic develop-

ment and growth, many state policymakers and

administrators have directed efforts to increase foreign manu-

facturing investment (FMI) in their jurisdiction. To outperform

their rivals, state governments have bee n particularly interested

in implementing exceptional tax policies and f‌iscal incentives

to attract more FMI.

Contrary to the expectations of state policymakers,

however, existing FMI studies have identif‌ied that the

effects of such direct benef‌its have not been equal, even

among states that have the same or similar investment envi-

ronments compared with competing states. Some states

have been very successful, but in others, effects have been

at best marginal or have even diminished. A survey of mul-

tinational enterprise managers showed that such direct tax

and expenditure benef‌its are not major considerations in

investment decisions (Tavares-Lehmann et al., 2012). This

study suggests that different institutional designs and regula-

tions that inf‌luence state taxing and spending decision-

making signif‌icantly affect the FMI of states within the

United States. Accordingly, examining the direct impact of

f‌iscal incentives does not help our understanding of FMI

because unique state f‌iscal institutions and regulations limit

policy manipulation before policymakers can intervene.

This paper is particularly interested in examining the rela-

tionship between f‌iscal federalism and FMI inf‌lows in the

American states. Foreign direct investment (FDI), including

manufacturing and services, is def‌ined as international

capital f‌lows that entail a 10% ownership stake in a business

unit in a foreign country. These investments exclusively

include the manufacturing sector, which accounted for

nearly 42.4% of total FDI stock in the United States at the

end of 2021 (BEA, 2022). FDI is attained by establishing a

new subsidiary/branch, acquiring a control share of an exist-

ing f‌irm, or participating in a joint venture. These types of

investments extend the f‌irm’s corporate network across

national political boundaries, allowing it to maintain owner-

ship over a package of resources transferred abroad including

capital, equipment, engineering expertise, and managerial

and marketing skills (Liu, 1997). FMI is a signif‌icant catalyst

for raising the employment rate, technological progress, pro-

ductivity, and ultimately economic growth.

Moran (2011) suggests that “manufacturing FDI brings

the host directly to the cutting edge of the latest technology and

best practices in production, quality control, and marketing world-

wide in any given industry—a cutting edge that is continuously

pushed forward and improved over time as the parent multina-

tional uses its aff‌iliates to reinforce its competitive position in inter-

national markets”(p. 39). Particularly, multinational manufacturers

have contributed to economic development in their host regionsby

actively helping local suppliers increase their facilities and improve

their reputation (Moran, 2011; Potter et al., 2003).

Despite the signif‌icant role of foreign manufacturers in

their host countries’economies, institutional and policy

uncertainty creates signif‌icant entry barriers for multinational

manufacturers. Mishra et al. (2018) have suggested that

foreign manufacturers located in countries with higher gov-

ernment stability can benef‌it from the increased international

manufacturing network that facilitates transparent informa-

tion sharing and a sustainable supply chain. According to

Moran (2011), foreign manufacturing industries’contribu-

tion to the host has noticeably relied on the target country’s

policy environment. Overall, FDI studies have suggested

that FMI’s positive impact on host economies is noticeably

high in regions where the host government has a stable insti-

tutional and policy environment. Thus, foreign manufactur-

ing investors prefer to visit those regions because they can

benef‌it from larger-scale economies as a consequence of

the host’s development.

As such, f‌iscal federalism provides a composite measure

of investment for foreign manufacturers because each state

has different levels of taxation and spending policies, f‌iscal

conditions, policy constraints, and intergovernmental rela-

tionships. As a result, the role of f‌iscally decentralized insti-

tutions demonstrates how stable policy and regulatory

environments determined by policymakers in institutional

dynamics inf‌luence FMI inf‌lows beyond FDI’s economic

implications.

The article proceeds as follows. First, this study reviews

the literature that examines determinants of multinational

corporations’locations in the United States. The following

section provides a theoretical linkage between f‌iscal federal-

ism and FMI by focusing on the f‌iscal decentralization level,

federal grants, and f‌iscally constraining institutions (includ-

ing spending and taxing limitations). After describing the

research design, I present the results from time-series cross-

sectional analyses for the period of 1987–2006. In the conclu-

sion, I discuss the key f‌indings and offer avenues for future

research.

Existing Literature on the Determinants of

FDI in the American States

Studies on FDI that directly examine within-state factors in

the United States have stagnated since the 2000s. Existing

econometric studies of f‌irm location decisions have suggested

that macroeconomic conditions attract potential f‌irms to invest

in American states. Although most studies have not directly

examined foreign manufacturing f‌irms, a large body of literature

on FDI has created a puzzle as to what factors determine the

investment decisions of multinational corporations, including

the manufacturing sector. Those studies have employed three

theories—f‌irm-specif‌ic ownership theory, internalization

theory, and location-specif‌ictheory—to explain important

determinants affecting investment decisions (Dunning, 1981;

Gordon & Lees, 1986). In ownership and internalization

Shin 65