Sectoral differences in the determinants of the location of foreign direct investment in American manufacturing

Foreign direct investment in the United States is an integral part of the competition among global industrial core regions. Most foreign investment in the U.S. originates in Europe, Canada, and Japan. Acquisition rather than new plant establishment is the favored mode of investment and the interregional supply of potential acquisition candidates constrains foreign investors' locational choices. This paper provides an analysis of the location of foreign employment in 15 disaggregated sectors across U.S. states in 1990. The results show that foreign firms concentrate employment in existing regions of production. Foreign investments in most raw materials processing sectors particularly favor these places. Some decentralization has occurred in several sectors, especially food, paper, chemicals and petroleum, rubber and plastics, stone, clay and glass products, and primary metals. Other significant determinants of location include labor force characteristics and certain regional preferences. No evidence was found in our analysis of disaggregate sectors that foreign investors avoid strong unions more than their domestic counterparts.     

Agglomeration effects and the location of FDI: evidence from French first-time movers

This paper analyses the location choice determinants of French first-time investments in Europe, North America and North Africa. Firm locations are examined on two geographical scales, the national and regional level. The final sample comprises 307 location choices in 27 countries and across 45 regions. Both, location- and firm-specific variables are used for analyzing investment strategies. The results show that higher market demand and cultural proximity to France increase the likelihood of a particular location to be chosen, whereas higher labour cost and a larger distance between a foreign location and the headquarters deter FDI investments. Manufacturing and older companies are more likely to establish their first subsidiary in Eastern Europe. Furthermore, this study examines the extent to which French investors choose foreign locations that already host a significant number of French firms. The results obtained from regressions with various absolute and relative agglomeration measures suggest that French investors are rather attracted by firm cluster in general, or by the unobserved factors that led to the agglomeration in the first place, than by any nation-specific firm cluster.     

Private investment in India: regional patterns and determinants

This paper analyses private investment by type for 15 major states over the period from 1993–1994 to 2004–2005. This study is new in investigating the determinants of total private investment and domestic private investment at the state level in the Indian context by using generalized method of moments panel estimator. The results show that there is high variation in private investment across Indian states. The results obtained from the regressions show that private investment in the Indian states is explained by infrastructure, the gross fiscal deficit, market size and labour productivity. This paper contributes to the literature on regional development by empirically establishing the existence of simultaneity between private investment and income at the state level in Indian economy.     

ECONOMIC AND POLITICAL DETERMINANTS OF REGIONAL INVESTMENT AND TECHNICAL CHANGE IN CANADA

ABSTRACT This paper seeks to develop an understanding of the most significant determinants of spatio-temporal patterns of private capital accumulation in Canadian regions by focusing on both economic and political attributes of the regional investment context. Economic variables include spatial variations in profitability of production. labor costs, and aggalomeration economics, while the chief political dimension is the extent of union organization and militancy within the regional labor force. Analysis of provincial manufacturing activity1 investigates the relative importance of economic versus political variables in shaping the histories of investment and technical change in individual provinces from the mid-1980s to the present.     

AN EVALUATION OF THE GREEK REGIONAL INCENTIVES POLICY, 1972-1987

ABSTRACT In this paper an evaluation of the Regional Development Incentives Policy in Greece is presented for the 1972-87 period. The main argument in this evaluation is that the incentives polity had limited impact on private investment decisions and, instead, facilitated existing trends in the sectoral composition and spatial distribution of private investment. The empirical evidence in support of tins argument indicates that subsidised investment did not prefer the sectors and regions where the incentives were stronger, while its sectoral and spatial distribution was similar to nonsubsidised investment. A case study for one of the problem regions confirmed these results and gave rise to questions about the appropriateness of the incentives policy for the Greek regional problem.     

Transport infrastructure and regional convergence: A spatial panel data approach

This article examines the contribution of transport infrastructure to the regional convergence in Spain for the period 1980–2008. Spatial econometric techniques are employed to decompose the direct, indirect and total effects of roads, railways, ports and airports. In addition, the analysis is complemented by estimating the determinants of the regional allocation of transport investments. Evidence confirms the presence of absolute and conditional convergence. However, only roads appear to have an impact on this convergence process. It is also understood that the main driver of transport investments has been the equalization of the infrastructure endowment between the different Spanish regions. The reduction of inequalities between regions in terms of road provision could explain the positive contribution of roads to the process of regional convergence in Spain.     

On the regional incidence of highway investments in the USA

The objective of this paper was to investigate the regional incidence of the aggregate effects of investment in highways in the US taking into consideration the presence of regional spillovers. The empirical results are based on VAR estimates at both the aggregate and state levels using output, employment, and investment, as well as different measures of highway investments. Empirical results allow us to establish several stylized facts. First, investment in highways affects private sector variables positively at the aggregate level as well as in most states. Second, the regional spillover effects are very significant for all private sector variables. Third, these spillovers have a clear geographical pattern in that they tend to be more important in western states and the corridor between the Great Lakes and the Gulf Coast.     

Regional investment under uncertain costs of location

Due to political and economic integration, firms face increasing opportunities for locating their activities in countries, regions and cities that provide the best business environment for their specific needs. In our study, we focus on the impact of economic risk and risk preferences upon regional allocation of capital investments. The source of risk stems from the difference in costs of location and the business cycle across regions. Firms are seeking ways to reduce their exposure of regional shocks. As a result, regional concentration of investment of capital is endogenous. A comparative static analysis shows that regional capital allocation depends upon the firm’s risk preferences. Our findings demonstrate the suitability of the two-moment approach with multiple risks as an alternative to the expected utility approach. The impact of changes in distribution parameters, such as the expected costs of location, the variance of costs of location and the correlation between locational costs (or the business cycle), can be fully characterized by the elasticity of risk aversion. Elements of risk preferences beyond risk aversion prove to be important to evaluate regional policies. This insight is of interest for empirical research in regional economics.     

On the economic and budgetary effects of investments in SCUTS: the Portuguese toll-free highways

This paper provides empirical evidence on the economic and budgetary effects of the recent investments in toll-free highways in Portugal, the so-called SCUTS, in an effort to bring some clarity to the current policy debate on these highways. This debate is centered on the issue of the financial sustainability of these highways for the public sector and is derived from the fact that their financing through public–private partnerships and shadow tolls involves regular payments from the public budget to the private firms operating them. In this context, the introduction of tolls has been suggested as a mechanism to alleviate possible budgetary pressures. Our first main conclusion is that investments in SCUTS have positive economic effects in all regions of the country. Furthermore, we find that regional spillovers account for about three-quarters of the total effects of these investments. A paradigmatic case is Lisbon, a region that captures the greatest share of these effects without any investments having actually occurred in the region itself. Our second main conclusion is that investments in SCUTS do not seem to generate problems of financial sustainability for the public budget. We estimate that for all SCUTS, the equilibrium tax rate, i.e., the rate that would balance the tax revenues induced by these highways and the shadow tolls the government has to pay, is lower than the effective tax rate for the economy. As a corollary and from a policy standpoint, our results suggest that the introduction of tolls is questionable from a conceptual perspective due to the magnitude of spillovers and seems to be unnecessary from a financial perspective.     

What sustains larger firms? Evidence from Chinese manufacturing industries

This study investigates what sustains large firms in China and identifies the determinants of firm sustaining. With the understanding of the triple process of economic transition, this study explores the influence of global–local interaction and regional factors on business sustaining. Based on the Annual Survey of Industrial Firms in China during 1998–2005, this paper employs the Cox proportional hazard model to confirm that global, provincial and local forces are critical for the sustaining of large firms. Particularly, the presence of foreign firms shows strong competition effect at the prefecture city level but no spillover effect at the provincial level. Provincial market-oriented institutions and market potential however are crucial to sustain businesses in China. Non-state-owned enterprises such as private and foreign firms are more dependent on market-oriented institutions than state own enterprises. Firms which are able to reap from agglomeration economies and local governmental supports are more likely to sustain. In addition, local factors show different impacts on business sustaining in different regions. The findings indicate that both market and state can play a substantial role in sustaining businesses in transitional economies.     

An industry disaggregated analysis of the determinants of regional entry and exit

Empirical research by, among others, Armington and Acs (Reg Stud 36:33–45, 2002) show that regional determinants of new firm formation differ between industries. This paper reinvestigates the regional determinants of entry and exit considering these findings using panel data methods at three different levels of aggregation. Agglomeration, in terms of localisation economies, is unequivocally found to be positive for regional new firm formation, but does not necessarily prevent firms from exiting. The results also show that industry structure is a more important explanatory variable for differences between entry and exit rates across regions than regional factors.     

Collaboration objectives and the location of the university partner: Evidence from the Piedmont region in Italy

This study examines firms' decisions to collaborate with universities in their region as opposed to non‐regional universities, focusing on the role of collaboration objectives. Through a survey of a representative sample of manufacturing firms in the Piedmont region (Italy), we find that firms seeking business advice are more likely to collaborate with regional universities while firms seeking R&D support and testing and analysis services are more likely to collaborate with both regional and non‐regional universities. The partner university's location is endogenous to the level of investment in the collaboration; and the collaboration objectives provide good instruments. Some implications for regional policy are discussed.     

Interregional allocation models of infrastructure investments

This paper deals with the allocation of public investments to some of the prospective key elements in the regional infrastructure. Two optimization models are suggested for allocating investment resources among regions and various infrastructure elements. Applications of the models illustrate solutions based on policy goals of economic efficiency and regional equity. The optimization models draw on the estimation of an aggregate regional production function.     

Growth effects of regional policy in Germany: results from a spatially augmented multiplicative interaction model

Private investment subsidies are a key instrument for regional policy making to foster the economic development in lagging regions. In this paper, we analyze their effect on labor productivity growth for German labor market regions for the period from 1994 to 2006. A spatially augmented multiplicative interaction model based on neoclassical growth theory is used, which allows us to assess the marginal effect of regional policy proxied by overall payments of the main German regional development program on the region’s convergence speed conditional on its initial income position as well as policy-related spillovers from its spatial neighborhood. Our results show a statistically significant positive effect of regional policy on labor productivity growth, which increases, the further away the supported region is from its steady-state income level, and the more grants are provided to its geographical neighborhood. The latter effect highlights the existence of positive spatial spillover effects from regional policy in Germany, which enhance the attractiveness of the whole macro region for private sector investments. The additional growth stimulus provided by a 1 % increase in the region’s funding volume is thereby related to an up to 0.3 % gain in terms of labor productivity growth. For regions with the highest initial gaps to steady-state income in the sample distribution, the regional policy stimulus accounts for almost 8 % of the regions’ productivity growth performance.     

Cultural diversity and entrepreneurship: a regional analysis for Germany

In this paper, we investigate the determinants of entrepreneurial activity in a cross section of German regions for the period 1998–2005. Departing from the knowledge spillover theory of entrepreneurship, the focus of our analysis is on the role of the regional environment and, in particular, knowledge and cultural diversity. Our main hypothesis is that both, knowledge and diversity, have a positive impact on new firm formation. As the determinants of regional firm birth rates might differ considerably with respect to the necessary technology and knowledge input, we consider start-ups at different technology levels. The regression results indicate that regions with a high level of knowledge provide more opportunities for entrepreneurship than other regions. Moreover, while sectoral diversity tends to dampen new firm foundation, cultural diversity has a positive impact on technology oriented start-ups. This suggests that the diversity of people is more conducive to entrepreneurship than the diversity of firms. Thus, regions characterized by a high level of knowledge and cultural diversity form an ideal breeding ground for technology oriented start-ups.     

Can privatization of distribution substations improve electricity reliability for non-residential customers? An application to Nepal

This paper takes on a novel perspective to the overloading of distribution substations by considering the common-pool characteristics of electric infrastructure capacity. Using firm- and substation-level data from Nepal, the results provide evidence of common-pool resource (CPR) problems across substations’ ownership boundaries: firms with captive substations experience fewer and shorter unplanned outages than firms connected to shared substations. Based on these findings, private investments in captive substations emerge as a coping mechanism for firms against unreliable electricity supply. A generalized cost-benefit analysis framework for such investments is developed and used to quantify the benefits to Nepalese non-residential customers.     

Decision support tool on investments in life safety based on sampling theory

For decisions related to investments in societal safety and health, it is often difficult to balance the discretionary competence of decision-makers with theoretical optimum levels of investment. While removing day-to-day decisions about risk from the political arena would arguably result in better decisions, a full depoliticisation is not desirable since public and private risk preferences cannot simply be neglected without negatively affecting the perception of risk and inducing a democratic deficit. Therefore, a decision-making tool has been developed which allows for narrowing the scope of possible decisions for the decision-maker, based on predetermined maximum acceptable deviations from the theoretic optimum investment level. These maximum acceptable deviations should be established upfront on a general basis and may subsequently be applied on a case-by-case basis. In this paper, the basic calculation concepts are explained and a detailed example study is presented in which limits for the target safety level of concrete slabs are determined under some specific considerations.     

Customary Land Reform to Facilitate Private Investment in Zambia: Achievements, Potential and Limitations

In the name of development, governments in Africa are reformulating land policies to facilitate privatisation of customary land rights. The main rationale for this is to stimulate private investment through tradable land titles, which will enhance local economic activity and ultimately contribute to increased incomes and poverty alleviation. However, these land reform proposals have often produced unintended results leading to exclusion of the poor and servicing the interests of the elite. Zambia is not an exception in the land reform rhetoric. In 1995, the government enacted a pro-investment law to attract investment from abroad. Consequently, large tracts of customary land were converted to private tenure as increasing foreign investments were made in the country. One example of such investments is mining; for example, Lumwana and Kansanshi mines were opened up in Solwezi. These mines have attracted more people and fringe investments in search of economic opportunities. This has further led to increased pressure on land as more people and organisations seek to acquire customary land from chiefs and convert it to private leaseholds. This paper uses personal experience and research to present the achievements, potential and limitations of private investments in local communities and their economy. The paper argues that, despite the huge potential of private investment, attaining poverty alleviation through land reform strategies in Zambia still remains overshadowed by conflicting agendas, i.e. serving the interests of poor citizens versus pursuing the collective global market agenda in order to gain international recognition and acceptance. This is particularly crucial given that these agendas are often at odds with each other.     

Green regions and local firms' innovation

Technological innovation is essential to achieve simultaneously economic, environmental and social goals (i.e., the green growth). Indeed, many studies found that environmental innovation spurs overall innovation. However, this topic has not been investigated by taking into account the geographical context. Therefore, our paper seeks to investigate whether ‘green regions’, with an increased public and private commitment in environmental issues, are related to innovation of local firms. Using data on Spanish manufacturing firms and regions, we find that environmental technologies (especially in green energy), environmental investments, and environmental management at the level of regions are positively associated to local firms' innovation.     

Where do foreign firms locate in transition countries? An empirical investigation

Firm-level data sets on foreign manufacturing plants in four Central and Eastern European Countries are used in this paper, to trace their location and estimate the determinants of their choice processes. A nested logit model as developed by McFadden (1974) is used in the analysis. A central focus of the analysis is foreign direct investment (FDI) which is a good indicator of where location of foreign investments is made. Several reasons explain the need for mapping the location of FDI. First of all, it facilitates understanding the real competitiveness of regions and countries in providing location advantages able to complement multi-national enterprises’ (MNE) specific advantages. Secondly, it directly shows the distribution of the benefits usually associated with FDI. Finally, an understanding of FDI location decisions is important for policy makers who believe that MNEs may offer a positive contribution to the economic development of disadvantaged areas and thus correct potential regional imbalances. The main results show that sector specific factors affect the choice of the final location. These unobserved characteristics influence both the determinants and the structure of MNEs location choice process. This paper has been written as a part of the Research Network on “The Impact of the European Integration and Enlargement on Regional Structural Change and Cohesion”, financed by the European Commission through the 5th Framework Programme. The authors are grateful to the other members of the Research Consortium and the participants at the international workshop “Modelling the Entrepreneurial and Innovative Space-Economy” organized by the Tinbergen Institute on 22–23 August 2005 for very helpful comments and suggestions provided on an earlier version of this work.