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Foreign Direct Investment And Urban Concentrations: Unbundling Spatial Lags

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  • Steven Poelhekke
  • Frederick Van Der Ploeg

Abstract

ABSTRACT Foreign direct investment (FDI) is seen as a way to import technology and catch up with economic leaders. It is therefore important to understand why some countries attract more investments by multinationals than others. We expand the set of common determinants of FDI with urban agglomerations and ask the question whether the accessibility of market potential and the number of potential investment locations, in the shape of urban concentrations, matters, since the importance of urban agglomeration economies for FDI has not been investigated before. We show that countries with several medium‐sized cities attract more foreign investment, especially if they are close to main agglomerations, but too much concentration (primacy) reduces the inflow of FDI. Moreover, we unbundle spatially lagged FDI by including spatial lags of the determinants of FDI. It is important to disentangle such third‐country effects in order to understand how FDI flows depend on the complex ways in which multinationals fragment sales and production across countries. Using a panel of U.S. affiliates’ sales in foreign countries between 1984 and 1998, we find evidence that cities are important drivers of FDI. Furthermore, third‐country effects suggest that horizontal and complex forms of FDI coexist.

Suggested Citation

  • Steven Poelhekke & Frederick Van Der Ploeg, 2009. "Foreign Direct Investment And Urban Concentrations: Unbundling Spatial Lags," Journal of Regional Science, Wiley Blackwell, vol. 49(4), pages 749-775, October.
  • Handle: RePEc:bla:jregsc:v:49:y:2009:i:4:p:749-775
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    File URL: https://doi.org/10.1111/j.1467-9787.2009.00632.x
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    Cited by:

    1. Chou, Kuang-Hann & Chen, Chien-Hsun & Mai, Chao-Cheng, 2011. "The impact of third-country effects and economic integration on China's outward FDI," Economic Modelling, Elsevier, vol. 28(5), pages 2154-2163, September.
    2. repec:eee:respol:v:47:y:2018:i:8:p:1538-1552 is not listed on IDEAS
    3. Xinye Zheng & Feng Song & Yihua Yu & Shunfeng Song, 2015. "In Search of Fiscal Interactions: A Spatial Analysis of Chinese Provincial Infrastructure Spending," Review of Development Economics, Wiley Blackwell, vol. 19(4), pages 860-876, November.
    4. Poelhekke, Steven & van der Ploeg, Frederick, 2010. "Do Natural Resources Attract FDI? Evidence from Non-Stationary Sector-Level Data," CEPR Discussion Papers 8079, C.E.P.R. Discussion Papers.
    5. Steven Brakman & Charles Van Marrewijk, 2009. "Introduction: Heterogeneity At Different Spatial Scales," Journal of Regional Science, Wiley Blackwell, vol. 49(4), pages 607-615, October.
    6. Hisamitsu Saito, 2015. "Firm Heterogeneity, Multiplant Choice, And Agglomeration," Journal of Regional Science, Wiley Blackwell, vol. 55(4), pages 540-559, September.
    7. Martijn Regelink & J. Paul Elhorst, 2015. "The spatial econometrics of FDI and third country effects," Letters in Spatial and Resource Sciences, Springer, vol. 8(1), pages 1-13, March.
    8. Steven Poelhekke & Frederick Ploeg, 2015. "Green Havens and Pollution Havens," The World Economy, Wiley Blackwell, vol. 38(7), pages 1159-1178, July.
    9. repec:kap:enreec:v:71:y:2018:i:2:d:10.1007_s10640-017-0159-y is not listed on IDEAS

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