Local Development and Indirect Effects of the Foreign Direct Investment in Portugal: The Importance of the Regional Absorptive Capacity

Abstract

FDI can operate as an important means of boosting regional economic development, both through its direct and indirect effects. In this article, we focus on the case of indirect effects and, specifically, we evaluate the rel- evance of the absorption capacity of the regions – prox- ied by a measure of human capital – to the occurrence and extent of FDI externalities. Although there are valid theoretical reasons to believe that the absorptive capac- ity of the regions is a factor that determines the existence of these effects, the available evidence is still scarce. This study seeks to contribute to this strand of research ex- amining the existence of FDI externalities within and be- tween sectors. Another advantage of the study is that of adopting a regional level of disaggregation more detailed than usually applied in studies of this nature. Specifically, we adopt a concept of region that includes the county in which the domestic firm is located together with all of the directly neighbouring counties. The results – using panel data and the System GMM methodology – confirm the importance of regional absorptive capacity, together with the geographical proximity between multinational and domestic firms.