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Drivers of FDI in the EU: Regulatory distance and revealed technological advantage

Author

Listed:
  • Chiara Castelli

    (The Vienna Institute for International Economic Studies, wiiw)

  • Ronald B. Davies
  • Mahdi Ghodsi

    (The Vienna Institute for International Economic Studies, wiiw)

  • Javier Flórez Mendoza

    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

This study examines the interplay between trade policy, in particular non-tariff measures (NTMs), and revealed technological comparative advantage (RTA) at the NUTS 2 level as drivers of foreign direct investment (FDI) over time. Combining data from the Orbis database (Bureau Van Dijk), the NTMs database (WTO I-TIP) and the European Patent Office (EPO PATStat), we construct a comprehensive panel database of European firms owned by foreign-owned EU and non-EU firms. This database includes financial information for both parent companies and their subsidiaries as well as detailed country- and sector-specific trade barriers from the perspective of both the home and host economies. Furthermore, this database allows us to compute tailored RTA variables reflecting firm-specific technological interests proxied by firms’ patent production across technology classes. Using a Poisson pseudo-maximum likelihood (PPML) estimator, our analysis reveals a heterogeneous impact of NTMs and RTAs on FDI investment in the EU regions. Specifically, while increasing the regulatory distance (RD) of technical barriers to trade (TBTs) and sanitary-and-phytosanitary-standard (SPS) measures hampers FDI investment from extra-EU companies, the results on tariffs support the regulatory jumping motive. Furthermore, local technological capabilities significantly support FDI, especially when RTAs reflect the technological interests of the foreign-owned subsidiary, while the effect is reversed when accounting for the innovation portfolio of the parent company.

Suggested Citation

  • Chiara Castelli & Ronald B. Davies & Mahdi Ghodsi & Javier Flórez Mendoza, 2025. "Drivers of FDI in the EU: Regulatory distance and revealed technological advantage," wiiw Working Papers 264, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:wpaper:264
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    Keywords

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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