Drivers of FDI in the EU: Regulatory distance and revealed technological advantage

Chiara Castelli, Ronald Davies, Mahdi Ghodsi and Javier Flórez Mendoza ()

No 264, wiiw Working Papers from The Vienna Institute for International Economic Studies, wiiw

Abstract: This study examines the interplay between trade policy, in particular non-tariff measures (NTMs), and revealed technological comparative advantage (RTA) at the NUTS 2 level as drivers of foreign direct investment (FDI) over time. Combining data from the Orbis database (Bureau Van Dijk), the NTMs database (WTO I-TIP) and the European Patent Office (EPO PATStat), we construct a comprehensive panel database of European firms owned by foreign-owned EU and non-EU firms. This database includes financial information for both parent companies and their subsidiaries as well as detailed country- and sector-specific trade barriers from the perspective of both the home and host economies. Furthermore, this database allows us to compute tailored RTA variables reflecting firm-specific technological interests proxied by firms’ patent production across technology classes. Using a Poisson pseudo-maximum likelihood (PPML) estimator, our analysis reveals a heterogeneous impact of NTMs and RTAs on FDI investment in the EU regions. Specifically, while increasing the regulatory distance (RD) of technical barriers to trade (TBTs) and sanitary-and-phytosanitary-standard (SPS) measures hampers FDI investment from extra-EU companies, the results on tariffs support the regulatory jumping motive. Furthermore, local technological capabilities significantly support FDI, especially when RTAs reflect the technological interests of the foreign-owned subsidiary, while the effect is reversed when accounting for the innovation portfolio of the parent company.

Keywords: FDI; tariff and non-tariff measures; revealed technological advantage (search for similar items in EconPapers)
JEL-codes: F23 O24 O34 R58 (search for similar items in EconPapers)
Pages: 45 pages including 10 Tables and 6 Figures
Date: 2025-06
New Economics Papers: this item is included in nep-eec
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