Agglomeration economies and location choice: Foreign direct investment in Hungary¹

Abstract

Since the beginning of the transition process, Hungary has attracted a significant amount of foreign direct investment (FDI), although this is unevenly distributed among the twenty Hungarian counties. This paper examines the determinants of FDI at a regional level in Hungary and more particularly assesses the importance of agglomeration effects among determinants. A panel model of the location determinants of FDI in Hungary is developed and estimated. Empirical testing suggests that counties with higher labour availability, greater industrial demand and higher manufacturing density attract more FDI. Surprisingly, higher unit labour costs attract FDI. In addition, inter-industrial agglomeration economies and infrastructure availability are found to be important. JEL classifications: C23, F21, F23, O18, R12.

Privatization, Foreign Acquisition and the Motives for FDI in Eastern Europe

“…The results using the former measure (not reported) are insignificant and stand in contrast to studies elsewhere on transitional economies, such as Boudier-Bensebaa (2005) or Buch et al (2005), that generally find a significant positive agglomeration effect. By contrast, with the large firm sample and finer 3-digit NACE industry classification the expected significant positive coefficient is found, as shown in Table 2.…”

“…Unit labour cost, as well as host and source country size and proximity turn out to be significant, so they conclude that both market-seeking and efficiencyseeking investments are taking place. Regional determinants of FDI, such as labour market and demand conditions, are considered in a study of multinationals in Hungary by Boudier-Bensebaa (2005), but data limitations preclude the author from establishing whether location was motivated by low cost production or access to local markets. Resmini (2000) uses information on individual investment projects by EU firms in the Central and Eastern European Countries (CEECs), classified into four types depending on the sector of destination (scale-intensive, high-tech, traditional and specialized suppliers).…”

What drives FDI in Central–Eastern Europe? Evidence from the IWH-FDI-Micro database

“…Their analysis focuses on a possible East -West divide and finds that location decisions in this respect are strongly influenced by the institutional quality of the host country. Boudier-Bensebaa (2005) investigates FDI in one selected CEE country -Hungary -at a regional level while Chidlow et al (2009) do the same for FDI in Poland. Some contributions select single determinants for location choice, such as the access to technology and the influence of research and development (R&D) activity (Chung and Alcácer 2002), or, with a focus 344…”

Foreign Ownership of Firms and Corruption in Africa

“…Among the 26 underlying studies that were reviewed by Bellak et al (2008), 22 of the studies had labour cost having a negative impact on FDI (Defever, 2006;Demekas et al, 2005) with 17 being significant. Two out of the four studies which reveal a positive coefficient use disaggregated data (Boudier-Bensebaa, 2005). This study uses unit labour cost as a control and it is expected to explain a good portion of foreign ownership of firm variation across firms but the actual influence need to be determined empirically.…”