FDI in Space Revisited: The Role of Spillovers on Foreign Direct Investment within the European Union

Abstract

We estimate a spatial econometric interaction model for bilateral aggregate FDI stock data between 25 European Union member countries in 2010. We find evidence for spatial spillovers of foreign direct investment for three different types of spatial dependence. Our results document FDI spillovers between neighboring countries of FDI origin countries, neighboring countries of FDI destination countries as well as between neighboring countries of both FDI origin and destination countries. Relying on recently developed methods, we provide the first model-consistent interpretation of marginal effects of market size (measured by GDP) as well as GDP per capita on bilateral FDI activity. Our research highlights the importance of taking into account spatial lags when estimating bilateral FDI gravity models.