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Location factors of FDI and the growing services economy


  • Aleksandra Riedl


Foreign direct investment (FDI) has increasingly shifted toward the service sector. This change in the industrial composition of FDI and the non-tradable nature of services may have altered the importance of location factors for investment decisions. To capture potential changes in FDI determinants, a contrasting sectoral analysis is performed. Based on FDI stock data from eight new EU member states for the period 1998-2004, we implement a dynamic panel approach allowing the speed of adjustment to the equilibrium investment level to vary across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Thus, government interventions to attract FDI are likely to boost the service sector immediately while having a slower impact on manufacturing FDI. Furthermore, as services are mostly non-tradable, FDI into this sector is largely based on market-seeking motives while FDI in the manufacturing sector is also driven by international price competitiveness measured by real unit labour costs. Copyright (c) 2010 The Author. Journal compilation (c) 2010 The European Bank for Reconstruction and Development.

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  • Aleksandra Riedl, 2010. "Location factors of FDI and the growing services economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(4), pages 741-761, October.
  • Handle: RePEc:bla:etrans:v:18:y:2010:i:4:p:741-761

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    References listed on IDEAS

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    Cited by:

    1. Markus Leibrecht & Aleksandra Riedl, 2014. "Modeling FDI based on a spatially augmented gravity model: Evidence for Central and Eastern European Countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(8), pages 1206-1237, December.
    2. Schäffler, Johannes & Hecht, Veronika & Moritz, Michael, 2014. "Regional determinants of German FDI in the Czech Republic : evidence from a gravity model approach," IAB Discussion Paper 201403, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    3. Martin Falk, 2012. "Determinants of Greenfield Investment in Knowledge Intensive Business Services," FIW Research Reports series IV-002, FIW.
    4. repec:wsr:ecbook:2010:i:iv-002 is not listed on IDEAS
    5. repec:bla:etrans:v:25:y:2017:i:4:p:593-623 is not listed on IDEAS
    6. repec:eee:iburev:v:27:y:2018:i:1:p:218-230 is not listed on IDEAS

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