The Effect of Foreign Investments on European Regional Productivity

Differences in productivity among regions have been mainly attributed to agglomeration economies, technology and human capital, while almost no evidence has been provided on the role of internationalization. In this paper we build unique measures of outward and inward foreign direct investment (FDI) counts at the NUTS 2 level and we assess the relationship between regional productivity and foreign investments in the Enlarged Europe. Regions with larger flows of foreign investment projects show higher productivity levels, but this correlation fades down as we control for a set of relevant regional characteristics. However, inward and outward FDIs exert a positive and significant effect on regional productivity growth. We also find that the type of investment matters. In particular, inward and outward investments in R&D have a positive effect on regional productivity, while incoming investments in Sales activities are detrimental for productivity growth..