Spatial linkages in FDI location: Evidence from the Spanish regions

Abstract

This paper examines the main factors behind the regional location of foreign direct investment (FDI) in Spain, at both the aggregate and sectoral levels, over the 1996-2013 period. To do so, a panel spatial Durbin model, which allows us to unveil patterns of substitution or complementarity in FDI across regions, is estimated. Our findings reveal that inward FDI in one region is complementary to that in neighbouring regions, a conclusion that is consistent with a complex vertical FDI strategy. Besides, they tend to confirm the hypotheses that FDI exhibits some inertia and is attracted by regions with: (i) large market size; (ii) large surrounding-market potential; and (iii) high levels of human capital and wages. However, the results cast some doubts on the role played by infrastructure, R&D and regional differences in taxes as key elements in attracting FDI.