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Foreign direct investment, agglomerations, and demonstration effects: An empirical investigation

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  • Frank Barry
  • Holger Görg
  • Eric Strobl

Abstract

Many previous studies have shown that the localisation of firms can be an important factor in attracting new foreign direct investment into a host country. What has been missing in this literature thus far, however, is an investigation into the reasons why industry clusters attract firms. We distinguish between ?efficiency agglomerations? as firms locating close to each other because they can increase their efficiency by doing so, and ?demonstration effects?, whereby existing firms send signals to new investors as to the reliability of the host country and newly entering firms follow previous firms. In this Paper we try to disentangle these two effects, by examining the location of US and UK firms in Ireland. We calculate proxies for ?efficiency agglomerations? and ?demonstration effects? and include these proxies in an empirical model of the location decision of firms. For US firms, we find that both efficiency agglomeration and demonstration effects are important determinants of entry. For UK firms, however, the evidence is not as clear-cut.
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Suggested Citation

  • Frank Barry & Holger Görg & Eric Strobl, 2004. "Foreign direct investment, agglomerations, and demonstration effects: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(3), pages 583-600, September.
    • Handle: RePEc:spr:weltar:v:140:y:2004:i:3:p:583-600
    DOI: 10.1007/BF02653105
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    More about this item

    Keywords

    Foreign direct investment; agglomerations; demonstration effects;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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