A new OECD report published on December 15 has found that regional disparities in foreign direct investment (FDI) are far greater than disparities in other economic metrics such as gross domestic product (GDP) and productivity.
Using fDi Markets data between 2003 and 2021, the report found that the top 10% of regions in OECD countries with the highest greenfield FDI attracted on average 700 times more than the bottom 10% of regions. By comparison, a top OECD region has a GDP per capita that is on average 2.3 times larger than a bottom region.
Fares Al-Hussami, an OECD economist and co-author of the report, tells fDi that this “large variation” between regions shows that multinational companies not only seek large and productive regions, but invest in “the top of the top” regions.
“These very large variations across OECD regions are mostly driven by variation within countries rather than between countries,” he says, noting that this is a sign that it is locations, regions and cities in competition for investment rather than countries.
Since the Covid-19 pandemic, the disparity of FDI between all regions has also been increasingly driven by differences within countries. In 2021, within-country FDI disparity accounted for almost 70% of the overall disparity, up from 61% in 2019. Mr Al-Hussami says this trend illustrates how uncertainty has led foreign investors to become more risk averse and shy away from investing in less developed, remote regions.
The UK, US and Australia accounted for more than half of the top 10% of the 432 regions included in the OECD analysis. The top three FDI regions globally were the US state of Texas, the UK’s capital metro area of Greater London and the state of Western Australia. Previous research by fDi found that half of the world’s top 100 FDI recipient countries had 40% or more of total inbound projects concentrated in just one city.
The impact of greenfield FDI in more developed OECD regions was also found to be more pronounced. The report noted that while greenfield FDI generates about 2.5 jobs per million of US dollars invested, this varies greatly between the top (4.1 jobs) and bottom (1.3 jobs) of regions.
Among the bottom 10% regions, more than 60% were in Colombia, Turkey and France, according to the OECD analysis. Some 14 regions included within the analysis did not attract any greenfield FDI in the 18-year period covered.
While there are a multitude of factors that influence the location choice of investors, the report shows that the gap between regional disparities of GDP and FDI can be the result of sectoral differences.
“Some countries care less about FDI disparities because it’s going into very specific sectors such as mining,” says Mr Al-Hussami, who notes resource-rich countries such as Australia, Canada and Chile as examples.
By comparison, European countries suffer from a different type of FDI disparity, which is the result of certain economically challenged regions lagging behind larger developed metro areas.
At the country level, the regional disparities in FDI per capita were the largest in Australia, Canada, Chile, Colombia, Iceland and Israel, according to the report. Meanwhile, regional disparities were lowest in the Czech Republic, Italy, Slovenia, Sweden, the UK and US.
Alexandre de Crombrugghe, an OECD economist who undertook surveys of regional investment promotion agencies (IPAs) for the report, notes that regional development has become a “top priority” for national IPAs, who aim to reduce inequalities within their countries by attracting investment.
He continues that they found that there is “no quick fix” to attracting more investment in remote, less developed regions and that different structures of IPAs do not necessarily lead to greater success as distributing FDI more evenly.
“Countries have very different systems and relationships [between regional and national IPAs], but coordination is often an issue,” he says, noting that it is difficult to draw conclusions about whether regional disparities in FDI can be reduced with different networks of IPAs at the national and subnational level.