The determinants of inward foreign direct investment: Evidence from the European regions

• We analyse the regional distribution of FDI in EU and its main determinants.
• We perform an exploratory factor analysis to reduce the number of FDI determinants.
• We estimate an FDI model and conduct five robustness checks.
• Economic potential, technological progress and competitiveness affect FDI location.
• Robustness checks show the findings are quite reliable.

The aim of this paper is to study the determinants of FDI in the 260 EU NUTS2 regions between 2000 and 2006. After reviewing the relevant literature and the major traits of the FDI regional distribution in the EU, we analyse its drivers. First, we specify the model and perform a factor analysis to reduce the vast number of potential determinants to a manageable size. Afterwards, we estimate a reduced version of the model with the extracted factors as independent variables. We find that economic potential, labour market characteristics, technological progress and competitiveness exert a significant impact on FDI location patterns; in contrast, market size and labour regulation do not seem to play any noteworthy role. Finally, we perform some robustness tests to make sure the results are not sensitive to outliers, spatial dependence, size of regions, endogeneity and the consideration of just the top 50 FDI recipient regions.