Foreign direct investment and agglomeration: evidence from Italy

A number of empirical studies have analyzed the effect of agglomeration on multinational investment, verifying whether the agglomerated areas attract foreign direct investment inflows. Despite the large number of papers, no systematic attempt has been made to disentangle whether FDI are attracted by the concentration of firms within the same sector (specialization) or within different sectors (diversity). Furthermore, the question whether firm size in the host area influences multinational investment is still unanswered. This paper provides empirical evidence of the role of agglomeration economies in attracting foreign direct investments within Italian regions and provinces, distinguishing between specialization and diversity, and of the role of firm size in foreign investors� choices. We employ a new territorial data set on foreign direct investment collected by the Italian Foreign Exchange Office for industrial and service sectors. We find strong evidence that specialized geographical areas attract FDI, whereas diversified areas do so only for industrial sectors; finally, there is little evidence that firm size has an impact on FDI since, if anything, only big firms in southern regions appear to have a positive effect on foreign investors� decisions.