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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 manufacturers’ significant influence on the economies of their host countries, institutional and policy uncertainty creates significant entry barriers for multinational manufacturers. Focusing solely on American state performance in economic development as measured 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.
