Foreign Investments and Productivity Evidence from European Regions

Differences in productivity across 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 Europe. Regions with larger outflows of foreign investments show higher productivity growth, but this correlation fades down with the number of investments and eventually becomes negative in regions with very high outward orientation. Inward investments are also positively associated with regional productivity growth, but only above a certain threshold. Results are robust to the introduction of a number of regional characteristics, to the control for endogeneity of foreign investments, and for spatial dependence.