Air connectivity and foreign direct investments: economic effects of the introduction of new routes

Abstract

The key research question for this study was whether the spatial network structure offered by the global airline system contributes to the development of Italian inward Foreign Direct Investments (FDIs). We argue that the introduction of a new route, by reducing firm’s transport costs and facilitating tacit and complex knowledge flow, should increase the likelihood of FDI exchange between newly connected regions. We employed a comparison group design considering both small and medium enterprises and large companies at the municipality level. The results showed that FDIs increased overall by 33.7% in the two years after opening of the new routes while FDIs in the control group decreased by 16.6%. Similar results were obtained using different measures of FDI (i.e. the number of generated employees) and by weighting the routes by their frequencies. Given the substantial benefits that urban areas can obtain from attracting multinational firms, our results provide new evidence of the contribution of transport infrastructures to local development. From a policymaker perspective, regional policies aimed at attracting FDIs must contextually promote the development of transport infrastructure and in particular international airports. Investments to improve air transport capacity, strategies to attract both traditional and low-cost airlines, providing legal authorization or financing ground transport are all critical aspects for the success of such policies.