Agglomeration and FDI: Bringing International Production Linkages into the Picture


wiiw Working Paper No. 121,
42 pages including 9 Tables and 4 Figures

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The attractiveness of a country for foreign direct investors stems from domestic factors but also from its interconnectedness with the global economy. While knowledge spillovers and domestic inter-industry linkages have been examined by the literature on FDI location, international linkages have been neglected due to data constraints. Using global input-output data, this paper investigates the role of backward and forward production linkages between countries for location choices of first-time greenfield FDI investors in the EU along with traditional agglomeration forces. In line with the literature it is found that firms tend to co-locate with other firms from the same country and industry. Most importantly, inter-industry linkages between the source and the host country emerge as an important attraction factor while the same does not hold for domestic inter-industry linkages.


Keywords: foreign direct investment, multinational enterprises, location choice, agglomeration, international linkages

JEL classification: F21, F23, R30

Countries covered: European Union

Research Areas: International Trade, Competitiveness and FDI