Deild SCHOOL OF SOCIAL SCIENCES Titill rannsóknar Höfundur What Drives Sector Allocation of Foreign Direct Investment? Dr. Helga Kristjánsdóttir helgakr@hi.is This paper analyzes power-intensive investment in a developed economy, awash with hydro power, yet remote and far from trading routes. The case country is Iceland, an island at the junction of the trade blocs of NAFTA and EU. Foreign direct investment is analyzed using a combination of the Knowledge-Capital and Gravity models. By combining these two models, both the effect of natural resources and labor market skills are taken into account when assessing foreign investments. Such a merger of data models can be used for other economies in a similar situation, having both abundant natural resources and an educated workforce. www.hi.is