Public procurement and foreign direct investment across France, Germany, Italy and the UK

Foreign direct investment (FDI) has become an important factor of economic development during the last decades. FDI contributes to the economic growth of the host economy through learning, diffusion of technology, positive externalities and capital inflows. Attracting FDI is currently an objective in its own right for many countries and this paper aims to identify policies affecting the multinational firm's decision to establish a subsidiary. After accounting for labour productivity and trade openness, cross-section analysis, both industry-wise and country-wise, indicates that public procurement, especially "buy national" policies, and agglomeration economies are statistically significant determinants of FDI. Although our findings pertain to four large European economies, e.g. France, Germany, Italy and the UK, they constitute relevant policy guidelines for developing countries as well. © International Atlantic Economic Society 2007.