N. 16/2001 by Roberta De Santis and Claudio Vicarelli

DETERMINANTS OF FDI INFLOWS IN EUROPE: THE ROLE OF THE INSTITUTIONAL CONTEXT AND ITALY'S RELATIVE POSITION

Abstract

Worldwide Foreign Direct Investment (FDI) flows have showed an impressive upward trend over the past two decades, which prompted the expansion of production internalisation and the economies' globalisation process. Developed countries were both the main sources and destinations of those flows. Italy has lagged behind in the internationalisation process. Insofar as FDI inflows contribute to the country’s accumulation process (and thus growth performance), 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 panel of (most representative) industrialised countries. Then, on the basis of the empirical results, Italy's endowment of factors affecting FDI is compared to that of the other major European countries included in the panel.

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 industrialised 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 R&D expenditure. In order to reduce this gap, Italy should improve its location-specific advantages. According to the result of the analysis, a suitable policy might improve a country's FDI attractiveness by creating a more FDI-friendly institutional context.