Spatial complementarity of FDI: the example of transition countries

This article investigates spatial determinants of FDI location. In particular, it focuses on FDI in neighbouring countries and foreign market potential for a panel of 25 transition countries in 1993--2010. The spatial FDI spillovers are found to be positive and economically large. Moreover, omitting spatial FDI leads to a serious misspecification of the model explaining FDI location and biases estimation of the coefficient of the foreign market potential variable, which is found to be a non-robust determinant of FDI location. The spatial complementarity is stronger for disaggregated data such as bilateral FDI and sector level FDI. There is substantial heterogeneity of spatial FDI spillovers across sectors. Spillovers are large and positive for services sectors and non-significant or even negative for manufacturing sectors.