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Foreign Direct Investment, Agglomerations and Demonstration Effects: An Empirical Investigation

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Author Info
Barry, Frank
Görg, Holger
Strobl, Eric

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Abstract

Many previous studies have shown that the localisation of firms can be an important factor in attracting new foreign direct investment into a host country. What has been missing in this literature thus far, however, is an investigation into the reasons why industry clusters attract firms. We distinguish between ‘efficiency agglomerations’ as firms locating close to each other because they can increase their efficiency by doing so, and ‘demonstration effects’, whereby existing firms send signals to new investors as to the reliability of the host country and newly entering firms follow previous firms. In this Paper we try to disentangle these two effects, by examining the location of US and UK firms in Ireland. We calculate proxies for ‘efficiency agglomerations’ and ‘demonstration effects’ and include these proxies in an empirical model of the location decision of firms. For US firms, we find that both efficiency agglomeration and demonstration effects are important determinants of entry. For UK firms, however, the evidence is not as clear-cut.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2907.

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Date of creation: Aug 2001
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Handle: RePEc:cpr:ceprdp:2907

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Related research
Keywords: agglomerations; demonstration effects; foreign direct investment;

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Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

References listed on IDEAS
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  4. Barry, F & Bradley, J, 1997. ""FDI and Trade : The Irish Host-Country Experience"," Papers 97/13, College Dublin, Department of Political Economy-.
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  5. Lee Branstetter, 2000. "Is Foreign Direct Investment a Channel of Knowledge Spillovers? Evidence from Japan's FDI in the United States," NBER Working Papers 8015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Peter J Buckley & Mark C Casson, 1998. "Analyzing Foreign Market Entry Strategies: Extending the Internalization Approach," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 29(3), pages 539-561, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vittorio Daniele & Ugo Marani, 2008. "Organized Crime and Foreign Direct Investment: The Italian Case," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Lipponer, Alexander & Buch, Claudia M., 2004. "Clustering or competition? : The foreign investment behaviour of German banks," Discussion Paper Series 1: Economic Studies 2004,06, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  4. Dutta, Nabamita & Roy, Sanjukta, 2008. "The Role of Foreign Direct Investment on Press Freedom," MPRA Paper 10185, University Library of Munich, Germany, revised 18 Jul 2008. [Downloadable!]
  5. Raffaello Bronzini, 2004. "Foreign Direct Investment and Agglomeration: Evidence from Italy," ERSA conference papers ersa04p321, European Regional Science Association. [Downloadable!]
    Other versions:
  6. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June. [Downloadable!] (restricted)
  7. Frank Barry, 2006. "Foreign Direct Investment and Institutional Co-Evolution in Ireland," Working Papers 200603, School Of Economics, University College Dublin. [Downloadable!]
  8. Barry, Frank, 2004. "Export-platform foreign direct investment: the Irish experience," EIB Papers 6/2004, European Investment Bank, Economic and Financial Studies. [Downloadable!]
  9. Frank Barry, 2005. "Third-Level Education, Foreign Direct Investment and Economic Boom in Ireland," Working Papers 200509, School Of Economics, University College Dublin. [Downloadable!]
  10. Gabor Bekes & Jörn Kleinert & Farid Toubal, 2006. "Spillovers from Multinationals to Heterogeneous Domestic Firms: Evidence from Hungary," IEHAS Discussion Papers 0616, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
    Other versions:
  11. Rashmi Banga, 2005. "Liberalisation and wage inequality in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 156, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
    Other versions:
  12. Barry, Frank, 2003. "Tax Policy, FDI and the Irish Economic Boom of the 1990s," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 33(2), pages 221-236, September. [Downloadable!]
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