Agglomeration and the location of foreign direct investment in Portugal

In urban economics, and more recently in the international economics literature, agglomeration has been offered as a principal determinant of new investment. Yet agglomeration has rarely been subject to precise statistical tests. In this paper, the availability of detailed urban and regional data for Portugal allowed for a close study of the spatial choices for newly created foreign-owned plants. It appears that agglomeration economies are decisive location factors. Service agglomeration has a notably strong effect, while industry-level localization economies and urbanization externalities are verifiable location determinants as well. Distance from the principal cities is statistically significant, but there is no evidence that local labor costs matter. (C) 2000 Academic Press.