EU funding as a determinant of foreign direct investments in rural areas - policy implications

Abstract

This paper analyzes the direct impact of the EU funding on the spatial distribution of Foreign Direct Investment (FDI) inflows in Latvian rural districts. While the determinants of inflows of FDI are often analysed at the regional and national level, the impact of the EU funding on the spatial distribution of FDI between the administrative entities within a single country is not extensively studied. The research objective is to assess the possible net impact of the EU funding on FDI inflows in Latvian rural districts, thus enabling the more targeted policy decisions with respect to the structure in future EU funding. To evaluate this impact, Instrumental Variables method is applied using the panel data on Latvian rural districts. The research results confirm that positive direct impact of the EU funding on the FDI inflows in Latvian rural districts exists, and it is substantial and statistically significant. At the same time, confounded ‘third factors’ might exist with negative impact on FDI inflows. While the spatial distribution of the FDI inflows in several regional aspects is rather uneven, the respective differences in the EU funding are less pronounced confirming the existence of negative ‘third factors’. Hence, the structure of the support by EU funds has to be revised to improve the local potential determinants of the FDI inflows with emphasis on infrastructure and human capital.