The Impact of FDI and Financial Depth on EU Regional Growth: Income and Spatial Heterogeneity

Background and objective: The paper explores the impact of foreign direct investment and financial development on regional growth at the EU regional level for 2005–2017. Both FDI and financial development are important determinants of the regions’ growth, but not for all EU regions homogeneously. Some EU regions seem to benefit more than others, depending on certain characteristics, which implies that FDI attraction policies need to bear in mind not only country specificities, but also regional specificities, hence confirming the need for developing FDI attraction policies at the subnational level: financial development, capacity building, and Investment Promotion Agencies are key, for example. Methods: The methodology used in the paper relies on a beta-convergence model and on fixed effects estimation. In addition, a GMM difference model accounts for endogeneity. Results: Our empirical findings indicate that, in less wealthy (and more peripheral) regions compared to wealthy regions, FDI productivity spillovers are more significant. In other words, in less wealthy regions, the imitation effect prevails over the competition effect. Conclusions: FDI and financial development are important determinants of regional growth, especially for less developed and peripheral regions. Contribution/value: Financial development is shown to be a crucial determinant for economic growth at the regional level, especially for peripheral regions, which raises essential policy implications, especially for the sake of economic disparities in the EU NUTS 2 regions. In other words, local access to finance, especially to bank credit, plays a crucial role for regional growth, despite the continuous integration of financial markets. Also, there is an income and geographic heterogeneity when it comes to estimating FDI spillovers; therefore, the impact of FDI on growth is not always homo- geneous across territories, which challenges the idea of simple “bright” or “dark” sides to the effects of FDI.