Spatial Determinants of Foreign Direct Investment

FDI flows grew exponentially during the 1990s, experienced a sharp decline over the period 20012004, and have recently started to recover. The decline was mostly due to a fall in FDI flows within the OECD, particularly of FDI flows to continental Europe. In recent years, FDI flows to developing countries have also increased substantially. This trend has been encouraged by governments who view it as a safer form of finance. In this paper we investigate whether the characteristics and policies of countries within a regional market interact to determine the location of FDI. In particular, we study the impact of tax policy on FDI given the policies adopted by neighbouring countries, and test the implications of New Economic Geography (NEG) models of tax competition for the effectiveness of tax policy in the core and the periphery of regional markets. The model is estimated using a bi-parametric spatial panel data estimator, which allows for spatial autocorrelation in the origins and destinations of FDI. JEL: F20, H87, C23.