The determinants of FDI: a new network-based approach

Abstract

This article investigates the determinants of FDI at sub-national level. It recognizes that MNEsModified Letter Turned Comma foreign activities are organized in networks of strongly interconnected, but geographically dispersed affiliates. This implies a different approach to the analysis of the determinants of FDI, which should focus on contextual factors able to stimulate economic relations at distance. Methodologically, we use a gravity-type model and different regression techniques with a new dataset on networks of FDI involving German and Italian regions. We find evidence that technologically proximate regions sharing the same industry profile are more likely to experience positive and large networks driven by MNEs, with weaker evidence related to cultural and institutional proximities, which cannot compensate the negative impact of geographic distance. The distinctive contribution of this paper is to emphasize that local policies to attract FDI are more likely to succeed if addressed to similar regions.