What drives global value chains of FDI at sub-national regions? Roles of agglomeration economies

This study explores the intricate relationship between Foreign Direct Investment (FDI) and spatial knowledge within the European Union (EU) subnational regions. While existing research has examined this relationship, it often oversimplifies the complexities involved. This study aims to fill this gap by dissecting various types of inward FDI based on sectors, investor origins, and spatial knowledge forms. Using extensive data spanning over 13 years, the study employs negative binomial regression analysis to investigate 223 EU subnational regions. The findings reveal that localized specialization, urbanization, and population density play significant roles in attracting FDI, particularly in manufacturing and logistics. Conversely, capital cities tend to deter manufacturing-related FDI due to resource constraints. Moreover, the study identifies the importance of agglomeration economies, measured by urbanization, in driving FDI across different models given the knowledge spillovers and technological externalities found in densely populated areas. In light of these findings, tailored policies that account for diverse factors – such as regional agglomeration economies and strategic value chain activities – are essential. Recognizing the complexity of multinational business activities is crucial for designing effective policies aimed at reducing regional disparities within the EU.