Evidence on the Determinants of Foreign Direct Investment: The Case of Three European Regions



Again we do not observe the same trend regarding FDI outflows (Figure 2). The performances
of Catalunya and Lombardia remained roughly close over the period. The high rate of FDI outflows
per capita in Baden-Württemberg confirms that Germany is one of the world’s biggest investor in
foreign countries with the United States and France.

The analysis of cumulative flows by sector reveals a few common trends and peculiarities,
which bring information on the economic landscape of each region (Table 1 and 2). However, this
analysis must be made with some care because sector data records the sector of the direct investor and
not the sector of the investment destination. This is not a problem for most economic activities where
the investor’s sector and the sector of the investment destination are the same. There is one important
exception: banks. When the direct investor is a bank, we do not know the sectors in which the bank
invests. Since banks are in general large investors, data by sector requires to be interpreted focusing
primarily on direct investors. Among the common trends, we observe that the
Finance and credit
sector accounts for a large share of FDI inflows in all regions, though to a lesser extent in Lombardia
(17%). The
Finance and credit sector represents investment banking activities. Banks often invest in
foreign enterprises via resident non-banking holding companies. Under the industrial breakdown
recommended by the OECD and Eurostat, FDI realized by banks via those holdings are recorded in the
Finance and credit sector. In Baden-Württemberg most of FDI inflows (70%) are realized by banks
and other financial institutions while this share reaches 41% in Catalunya.

Another sector that accounts for a large share of FDI inflows in all regions is the sector of
Other services (real estate, transport, trade, hotel). The foreign firms belonging to this sector represent
the second most important FDI provider in all regions (35% in Catalunya, 17% in Lombardia and 11%
in Baden-Württemberg). The ranking of this sector reflects the predominance of services in the
economy of rich countries.

The last common trend that may be highlighted is the high share of Traditional Manufacturing
in FDI outflows of all regions (35% in Catalunya, 12% in Baden-Württemberg and 35% in
Lombardia). This is the first sector in Catalunya and Lombardia. In Baden-Württemberg, if we add
this sector and
Machinery and Automotive, the share climbs up to 30%. This shows the tendency of
rich countries to offshore activities in those sectors.

On the other hand there are differences among the three regions. The cumulative FDI flows in
Catalunya are dominated by two sectors,
Finance and credit and Other services, which accounted for
three quarter of FDI inflows and about 60% of FDI outflows over the period 1993-2003. The
electrical, electronic and high tech industries have attracted 10% of FDI inflows.

The case of Baden-Württemberg is even simpler: 70% of FDI inflows are realized by financial
institutions. This means that firms entering this market are, to a wide extent, banks and the investment
operations are mostly acquisitions of domestic firms’ shares. The distribution of FDI outflows is more
balanced. The firms from this German region investing abroad belong to the sector of
Finance and
Credit
, Other services and Traditional Manufacturing and Machinery and Automotive.

In Lombardia, the distribution of FDI Inflows reveals more diversified foreign investment and
a predominance of manufacturing investments: 31% in
Traditional Manufacturing, 16% in Machinery
and Automotive
, 10% in the electrical, electronic and high tech industries and 9% in Chemical. The
sector of
Other services do not represent a high share of FDI inflows and outflows. This shows the
high specialization of this region in industry. The Lombardian banks are nonetheless active abroad.
The sector
of Finance and credit accounts for 34% of FDI outflows.



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