The Determinants of the Regional Distribution of Foreign Direct Investment

Abstract

Earlier chapters noted the increasingly active participation of the UK in world flows of direct investment, and particularly with respect to inward investment, alongside the shifting UK regional pattern of this investment. The purpose of this chapter is to advance some simple hypotheses to explain the changing behaviour of the new inward investor with regard to regional location, and to show how these hypotheses can be empirically defined and then tested. Despite the numerous and sometimes severe nature of the theoretical and empirical problems encountered, this chapter will show that variation in the UK distribution of new FDI can be largely explained in terms of relatively few regional economic characteristics. The relationship between the regional pattern of inward investment and these economic characteristics is consistent with a number of models of MNE behaviour including the preferred simple explanation that the new foreign investor chooses a UK regional location in order to minimise the relevant costs of production whilst securing access to adjacent national and international markets. The policy implications that stem from this simple model and its verification are many and substantial. For example, the sectoral marketing and employment policies of the new inward investor will largely determine the mix of regional characteristics that are necessary in order to minimise production costs, including transport costs, and will therefore according to this model, influence regional location. Hence particular regions will not only attract differing shares of inward investment according to their regional characteristics, but the very nature of the inward investors attracted will reflect the particular mix of economic characteristics that the region can offer.