Determinants of foreign direct investment in Spain

Abstract

This study utilizes panel data as a means of examining the determinants of foreign direct investment (FDI) in Spain. Data that takes in the period 1993 to 2002 is used in order to estimate the determinants of FDI, at the sectoral level, by differentiating the manufacturing sectors, and at the regional level. The analysis investigates the sectoral, regional and macroeconomic variables that have successfully attracted FDI inflows from those that have not. Empirical results suggest that the differential between labour productivity and the cost of labour has been an important determinant of FDI in Spain during the period 1993-2002. Factors related to demand, the evolution of human capital, the export potential of the sectors, and certain macroeconomic determinants that measure the differential between Spain and the European Union average, also play a very important role in attracting flows of FDI. Certain policy issues that are relevant to the results are also discussed.