Abstract

This paper investigates the role of social capital in determining the size and the direction of FDI-induced spillovers on the economic growth of EU regions. The idea is that the nature and the quality of foreign companies' relationships with local firms depend on the endowment of social capital of that location. A «wrong» social capital may make these relationships difficult, thus limiting the capacity of the host economy to benefit of FDI-induced spillovers conducive to growth. We considered informal institutions in terms of generalized trust, associational activity, and cultural closeness and we found that spillovers effects do not arise when generalized trust is «self-referential», active participation to associational activities is low, and the society is characterised by cultural closeness towards foreigners. Moreover, we found that positive FDI-induced spillovers are associated with EU-originating foreign firms and FDI in services only. From a policy perspective, this implies that the origin of foreign investors as well as the sectoral composition of FDI inflows should be carefully considered. Furthermore, investments in education may help regions to benefit more from the foreign presence because human capital and social capital tend to be complementary.