Contrasting the dynamic patterns of manufacturing and service FDI: Evidence from transition economies

Aleksandra Riedl ()

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: We contribute to the foreign direct investment (FDI) literature by providing first empirical evidence on the relative importance of location factors for service and manufacturing FDI. This is of particular interest as the global stock of inward FDI in the service sector has become predominant in the last ten years. Based on a sectoral panel of eight new European member states in the period of 1998 to 2004 we perform a dynamic panel analysis allowing for individual adjustment periods across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Furthermore, since services are mostly non-tradable, FDI into this sector is largely based on market-seeking motives while manufacturing FDI is also driven by international price competitiveness measured via real unit labor costs.

JEL-codes: C23 F21 P33 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-tra
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Working Paper: Contrasting the dynamic patterns of manufacturing and service FDI: Evidence from transition economies (2008)
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