Drivers of Foreign Direct Investment in the EU: Regulatory Distance and Revealed Technological Advantage

Chiara Castelli, Ronald B. Davies, Mahdi Ghodsi and Javier Flórez Mendoza

No 202520, Working Papers from School of Economics, University College Dublin

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: 37 pages
Date: 2025-07
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