Determinants of FDI for Spanish regions: evidence using stock data

Abstract

After decades of academic debate on the factors that determine FDI, the discussion still remains open. This article empirically investigates the determinants of FDI activity using Spanish regional data (NUTS 2) for the period 2004–2013. We apply the Poisson pseudo-maximum-likelihood estimator with country-origin fixed effects in a gravity framework and implement an exploratory factor analysis to avoid collinearity problems. The empirical analysis revealed the following allocation patterns: FDI locational strategies in the Spanish regions are determined significantly by the economic potential, competitiveness and agglomeration effects of the regions, and to a lesser extent, by the productive capacity. We also confirm the adequacy of using the stock of FDI in the empirical analysis and obtain an improved specification of the model compared to previous literature based on FDI flows. The results allow us to draw some policy implications about the prospective promotion of incoming FDI at the subnational level.