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

According to the previous inequality, horizontal FDI will be more likely when transport costs
are high, plant fixed costs low and wages low. By manipulating algebraically this inequality and
following Markusen (2002), Feenstra (2004) proves that such inequality holds also for high level of
GDP, especially when they are similar across region i and region j. Moreover, such an inequality is
likely to hold when the relative endowment in human capital (high and medium skilled workers) is
high and similar across regions.⁵

This shows briefly the theoretical motivation that makes firms prefer direct investment to
export. After having established these theoretical arguments, we carry on with an empirical analysis in
order to assess the weight of those factors in determining FDI inflows.

3.2 Descriptive statistics

3.2.1 Market size and economic potential: some evidence

All our regions are strong economic powers within their respective countries without
possessing the traditional attributes that come with central political power. Nevertheless, there are
some differences among them. Baden-Württemberg and Lombardia are significantly more populated
than Catalunya (see Table 5). They are also wealthier. Baden-Württemberg is the richest of the three
regions as measured by GDP per capita over the period 1995-2002 (Figure 3). Then comes Lombardia
followed by Catalunya close to the EU average. A convergence among these three regions towards the
EU average standard of living can be observed (Figure 3). This means that the growth rate of GDP per
capita in Catalunya has been higher than the two other regions’.

Table 4: Fact sheet of three European regions

(Source EUROSTAT and regional institutes of statistics - Calculus: Authors)

⁵ Intuitively, we can justify this effect by looking at the increase in productivity of the unique input, labor.

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