Determinants of foreign direct investment in Spain: A gravity model

Abstract

Since the Great Recession arrived to Europe in general and in Spain in particular, the economists have focused all their efforts on finding ways for reducing unemployment and increasing output. The case for Spain, as many other Southern European countries, is more difficult since a debt crisis must be added to its current financial crisis. For that reason this paper studies the Spanish Balance of Payments, in order to illustrate the problems generated by the accumulation of Current Account deficits and how can a surplus help to reduce such an accumulated debt. However, the reduction of such a debt could be a long-term and hard process so for raising employment right now there is a need to appeal to Foreign Investors. Foreign Direct Investment (FDI from now onwards) received by Spain and the potential income and employment they can generate will be one of the main issues on this work. In order to analyze that, the first step is to collect data about FDI made by Spanish Multinationals and about FDI made by foreign companies on this country and study what proportion is reinvested on Spanish affiliates and what is distributed as dividends between foreign shareholders. The last step will consist on creating a Gravity Model using a bunch of representative economies with the objective of learning what characteristics of our companies should be fostered in order to increment inward FDI.