Abstract
This paper investigates spatial determinants of FDI location. In particular, FDI in neighboring countries and foreign market potential are two variables it focuses on. The sample includes a panel of 27 transition countries in 1993-2007. The spatial links are found positive and economically large. Omitting spatial FDI leads to a serious misspecification of the model and biases estimation of the coefficient of the foreign market potential variable, which is found to be a non-robust determinant of FDI location. As the analysis of sub-samples of the data indicates, the FDI complementarity is stronger for the CIS countries and for earlier period. The spatial complenmentarity is stronger for disaggregated data such as bilateral FDI flows and industry level data. I find substantial heterogeneity of spatial FDI spillovers across industries. Spillovers are large and positive for services sectors and non-significant or even negative for manufacturing sectors.
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