The Indirect Regional Impact of Inward Investment

Abstract

The UK has had a policy of encouraging inward investors since at least 1979, and has been successful in attracting a large proportion of all foreign direct investment (FDI) into the EU (IBB, 1993). The theory of FDI points to many reasons why countries would wish to attract inward investment, going well beyond direct employment effects. Theory assumes that, in general, in order to prosper in a foreign environment the firm must possess some ‘ownership’ advantage. Vernon (1966), for example, attributed this to superior or new products, while Dunning (1979) asserted that to be able to locate profitably outside its home country a company must have some firm-specific advantage of the type described in his eclectic theory (Dunning, 1988a). The general explanation concerning ownership advantages has recently been characterised more specifically, for example in terms of technological advantage (Cantwell, 1987). This is an important distinction. If ownership advantages are in terms of technological superiority, then this can be measured using factor productivity. Indeed Davies and Lyons (1991) measure this productivity gap and conclude that the foreign-owned sector has an advantage of some 40 per cent over the domestic sector.