Are there Regional Spillovers from FDI in the UK?

Abstract

One of the aims of attracting FDI to the UK through incentives is to improve regional development. Having firms locate in depressed regions, or regions with relatively low activity, will provide a direct impact in terms of employment and capital creation — assuming there were under-utilised resources prior to entry and a potential indirect effect via spillovers to local firms. A recent example of such intervention is the aid package given to Siemens to locate in the North East of England, an underdeveloped region with Assisted Area status. State investment included a $30 million grant which, along with other benefits, totalled $76 million (UNCTAD (1996)). The assumption behind such packages is that the long-term economic impact on the region will exceed the cost of the subsidies. We aim to examine whether spillovers from foreign to domestic firms occur at the level of the region. We look at whether domestic firms gain from foreign firms only if they locate in the same region, or whether all firms in a sector gain regardless of location.

The authors acknowledge financial support from the Leverhulme Trust under Programme Grant number F114/BF and a grant from the European Commission through the 5th Framework Programme (contract HPSE-CT-1999-00017). We are grateful for comments from the CEPR meeting ‘Labour Market Effects of European Foreign Investments’, Madrid, 20–21 October 2000.