The Determinants of FDI Inflows in Europe : The Role of the Institutional Context and Italy's Relative Position

Worldwide Foreign Direct Investment (FDI) flows have showed an impressive upward trend over the past two decades, which prompted the expansion of international production and the economies' globalisation process. Developed countries were both the main sources and destinations of those flows: in 1999 they accounted for 92% of global outflows and 74% of global inflows.In 1999, the EU area was the world's main outward investor and inward host area for FDI. Among European countries, Italy has lagged behind in the internationalisation process. Insofar as FDI inflows contribute to the country's accumulation process, the situation is worrying. The present paper tries to analyse Italy's relative disadvantage, by focusing on FDI location determinants. An empirical analysis is performed to define FDI inflows determinants common to a narrow group of (most representative) industrialised countries. Then, on the basis of the empirical results, Italy's endowment of factors affecting FDI is compared to the one of other major European countries included in the sample.The results of empirical estimates reinforce the evidence stemming from the descriptive analysis: Italy's appeal as FDI host country is poor compared to other major European countries. In fact comparing the FDI determinants' endowments of the European countries, Italy ranks low for competitiveness in terms of employers' social security contributions, Government interference with the market and Ramp;D expenditure.In order to reduce this gap, Italy should improve its location-specific advantages. These determinants are in fact the only factors the host Governments can directly influence. Thus, a suitable policy might improve a country's FDI attractiveness by creating a more FDI-friendly institutional context