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Location factors of FDI and the growing services economy

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  • Aleksandra Riedl

Abstract

Foreign direct investment (FDI) has increasingly shifted toward the service sector. This change in the industrial composition of FDI and the non‐tradable nature of services may have altered the importance of location factors for investment decisions. To capture potential changes in FDI determinants, a contrasting sectoral analysis is performed. Based on FDI stock data from eight new EU member states for the period 1998–2004, we implement a dynamic panel approach allowing the speed of adjustment to the equilibrium investment level to vary across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Thus, government interventions to attract FDI are likely to boost the service sector immediately while having a slower impact on manufacturing FDI. Furthermore, as services are mostly non‐tradable, FDI into this sector is largely based on market‐seeking motives while FDI in the manufacturing sector is also driven by international price competitiveness measured by real unit labour costs.

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  • Aleksandra Riedl, 2010. "Location factors of FDI and the growing services economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(4), pages 741-761, October.
    • Handle: RePEc:bla:etrans:v:18:y:2010:i:4:p:741-761
    DOI: 10.1111/j.1468-0351.2010.00391.x
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    Cited by:

    1. Markus Leibrecht & Aleksandra Riedl, 2014. "Modeling FDI based on a spatially augmented gravity model: Evidence for Central and Eastern European Countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(8), pages 1206-1237, December.
    2. Schäffler, Johannes & Hecht, Veronika & Moritz, Michael, 2014. "Regional determinants of German FDI in the Czech Republic : evidence from a gravity model approach," IAB-Discussion Paper 201403, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    3. Johannes Schäffler & Veronika Hecht & Michael Moritz, 2017. "Regional determinants of German FDI in the Czech Republic: new evidence on the role of border regions," Regional Studies, Taylor & Francis Journals, vol. 51(9), pages 1399-1411, September.
    4. repec:wsr:ecbook:2012:i:iv-002 is not listed on IDEAS
    5. Krammer, Sorin M.S. & Strange, Roger & Lashitew, Addisu, 2018. "The export performance of emerging economy firms: The influence of firm capabilities and institutional environments," International Business Review, Elsevier, vol. 27(1), pages 218-230.
    6. Hong, Seiwoong & Lee, Junyong & Oh, Frederick Dongchuhl & Shin, Donglim, 2023. "Religion and foreign direct investment," International Business Review, Elsevier, vol. 32(1).
    7. Sanjoy Kumar Saha, 2022. "How Does the Impact of Foreign Direct Investment on Labor Productivity Affects Productive Capacity?," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 12(4), pages 101-135.
    8. repec:wsr:ecbook:2010:i:iv-002 is not listed on IDEAS
    9. Aneta Bobenič Hintošová & František Sudzina & Terézia Barlašová, 2021. "Direct and Indirect Effects of Investment Incentives in Slovakia," JRFM, MDPI, vol. 14(2), pages 1-12, February.
    10. Sandeep Kaur & Pushp Kumar & Mohd Arshad Ansari, 2024. "An analysis of Indian FDI inflows through an augmented gravity model: exploring new insights," International Economics and Economic Policy, Springer, vol. 21(2), pages 435-455, May.
    11. Marie-Line Duboz & Nathalie Kroichvili & Julie Le Gallo, 2019. "What matters most for FDI attraction in services: country or region performance? An empirical analysis of EU for 1997–2012," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 63(3), pages 601-638, December.
    12. Sanjoy Kumar Saha, 2024. "Does the Impact of the Foreign Direct Investment on Labor Productivity Change Depending on Productive Capacity?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8588-8620, June.
    13. Sebastian Tocar, 2018. "Determinants Of Foreign Direct Investment: A Review," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 21, pages 165-196, June.
    14. Helmi Hammami & Moez Hammami & Siriki Coulibaly & Mariem Marzouk, 2020. "Determinants of FDI attractiveness: A MCI model approach," Economics Bulletin, AccessEcon, vol. 40(2), pages 1033-1048.
    15. Veronika Hecht, 2017. "Location choice of German multinationals in the Czech Republic," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(4), pages 593-623, October.
    16. Giammanco, Maria Daniela & Gitto, Lara, 2019. "Health expenditure and FDI in Europe," Economic Analysis and Policy, Elsevier, vol. 62(C), pages 255-267.

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