FDI location across British regions and inward investment policy

Abstract

The theory and empirical evidence on FDI location emphasise agglomeration economies over classical location factors, such as grants. This paper uses panel data to analyse the effect of the main instrument of inward investment policy, the UK regional policy grants, on the distribution of FDI projects across British regions over 1985-05. Using a GMM estimator the paper finds grants have a significant effect on FDI, even when agglomeration terms are included, but that its effect diminished over the 1990s. This is attributed to a redrawing of the eligible areas map. It concludes that in relation to foreign investment regional policy is no longer able to affect the regional distribution of FDI, so the grants are an instrument of national development policy