What factors attract foreign direct investment?

CONCLUSIONS

The findings reported in this paper provide tentative support for the hypotheses that the attraction of inbound FDI into the West Midlands and Scotland is related to the search for markets, resources and efficiency. Both Advantage West Midlands and Locate in Scotland suggest a series of common factors as to why their regions are attractive to FDI. On the supply side these include a highly skilled, welleducated and flexible workforce, and efficiency related factors including agglomeration economies. On the demand side market related factors such as the availability of a pool of affordable labour appear to be important, as do the size of the local market and transport and telecommunications infrastructure.

The results from our study suggest that different factors may be attracting inbound FDI into the West Midlands and Scotland from the TNC decision-makers point of view. For the West Midlands, government regional assistance and levels of education are significant positive determinants of FDI, while the size of the regional population has a negative effect on FDI inflows. For Scotland, unemployment, average regional wage earnings, and the size of the regional population all have positive impacts on FDI, while government regional assistance is negatively related to FDI.

These findings also help to explain the difference between the types of FDI which each region predominantly attracts: engineering, automotive and software activities, in the case of the West Midlands, and electronics and services activities, in that of Scotland.

This contrasting pattern can be explained at least in part by the findings reported above. Both regions exhibit path dependency in terms of the type of FDI that they attract, showing an apparent continuing tendency to attract FDI into sectors such as engineering and electronics that are already significantly represented in the West Midlands and Scotland. However, the aggregate data collected over time hides the fact that there are changes taking place in the structure of both regional economies influencing the focus of FDI.

In the West Midlands there has been a growing trend towards, business service companies and in particular IT and software organisations. In the case of Scotland the services sector has also come to the fore in recent years as a prime target for inbound FDI. The use of aggregate FDI figures alone for each region makes it impossible to pick-up these more recent changes in the focus of FDI.

There is therefore, some difference between the factors that are suggested as being the drivers behind FDI into the West Midlands and Scotland by the official inward investment agencies and those which appear to be important from the findings discussed in this paper.

REFERENCES

Advantage West Midlands, 2000, Investing in the Heart of England

Arpan, J. and Ricks, D.A., Directory of Foreign Manufacturers in the United States (Atlanta: School of Business Administration, Georgia State University, 1995).

Bagchi-Sen, S. and Wheeler, J.D., 'A Spatial and Temporal Model of Foreign Investment in the US,' Economic Geography, 65.2 (1989), ppl 13-129.