Abstract
AbstractThis paper investigates how institutional conditions at national and regional levels shape the decisions of Multinational Enterprises (MNEs) to invest abroad by means of either acquisitions or greenfield investments. The empirical analysis covers all foreign direct investment (FDI) projects in the European Union by the largest MNEs in the world to study alternative choices by the same firm and account for firm‐level characteristics in investment decisions. The empirical results show that—other things being equal—regions with stronger investment eco‐systems are more likely to attract acquisitions, while greenfield investments are more likely in regions with comparatively weaker systemic conditions. Howerver, the regional quality of institutions makes a fundamental difference to the nature of the investment projects attracted by regions: those with high quality of government can attract greenfield investments undertaken by the most productive MNEs. By improving their quality of government, local, and regional policy makers can attract higher quality greenfield investment projects to their constituencies, potentially breaking the vicious circle between low productivity areas and low productivity FDI.
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