Factors determining foreign direct investment in the services sector: the case of Spain

Abstract

Purpose This study aims to investigate the determinants of foreign direct investment (FDI) in Spain’s services sector, which has become the primary destination for inward FDI in advanced economies but remains underexplored in empirical research. It aims to identify how market size, human capital and trade performance shape investment inflows, offering new evidence on the macroeconomic drivers of FDI in a major European economy. The findings provide insights for policies aimed at attracting high-value, knowledge-intensive service investments and enhancing Spain’s competitiveness within the global services landscape. Design/methodology/approach The analysis uses a new quarterly data set (1996–2023) combining firm-level FDI declarations with macroeconomic indicators. A ridge-regularized log–log regression framework estimates long-run elasticities while addressing multicollinearity and overfitting. The penalty parameter is selected via tenfold cross-validation and verified through rolling time-series validation. Robustness is assessed using ordinary least squares, least absolute shrinkage and selection operator and Elastic-Net estimators. Diagnostic tests confirm model stability and strong predictive performance, allowing consistent interpretation of the key macroeconomic relationships driving service-sector FDI in Spain. Findings Results show that market size is the strongest positive determinant of FDI inflows, followed by human capital and service exports, while imports have a negative effect. Lagged FDI indicates persistence and path dependence in investment flows. These relationships remain stable across alternative regularization techniques, confirming robustness. The findings highlight that domestic demand, skilled labor and external competitiveness attract foreign investors, whereas import dependence may signal competitiveness weaknesses. Overall, the evidence underscores Spain’s potential to strengthen its role as a destination for high-value, knowledge-intensive FDI in services. Originality/value This paper provides one of the first comprehensive macroeconomic studies of FDI in Spain’s services sector using a long quarterly data set and a regularized econometric approach. It integrates multiple theoretical perspectives – market-seeking, efficiency-seeking and human-capital-based investment theories – into a unified empirical framework. By focusing on services rather than manufacturing, it fills a major gap in the Spanish FDI literature. The methodological design offers a replicable approach for analyzing service-sector FDI in other advanced economies and contributes actionable insights for policies promoting sustainable, innovation-driven investment.