FDI and regional development

FDI and regional development

April 13, 2015

Foreign direct investment (FDI) can play an important role in raising a region’s technological level, its productive efficiency and its ability to compete internationally. Foreign firms bring new technologies, new knowledge, and new management skills, and local firms can learn from this. However, fears have also been raised that foreign competitors crowd out local firms, and a net positive effect on the regional economy can not be taken for granted.

On behalf of the European Commission, Copenhagen Economics has identified and measured externalities arising from FDI at the regional level. We show that productivity is increased through both vertical and horizontal spillovers. In other words the whole value chain as well as competitors are positively affected by an inflow of FDI. We also confirm that over time labour demand is unaffected by inflow of FDI.  However, both job creation and job destruction occur in industries with many foreign firms over the short run. But overall, FDI is a positive stimulus on regional employment.

In a second part of the study, Copenhagen Economics has investigated what drives FDI flows. We find clear evidence that FDI is attracted by regional policy. Thus, investments in educating the regional work force, increasing the level of spending on R&D, supporting strong regional clusters, and raising the penetration of new technology and infrastructure all increase the likelihood of receiving FDI significantly.

The report can be downloaded here

For further information you are welcome to contact Mr. Martin Hvidt Thelle