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The role of FDI in preventing imbalances in the euro area

Author

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  • Maria Demertzis
  • Peter Pontuch

Abstract

The recent crisis has revealed the unsustainability of large debt-financed negative external positions. Foreign direct investment is a more stable financing option for the current account because in general it is not debt-generating and has positive effects on the productivity of the recipient economy. After reviewing the determinants and mechanisms driving total FDI, this focus section goes on to look at the composition of FDI. Tradable sector FDI has the potential to improve the trade balance by stimulating exports. Policies that can attract FDI in tradable sectors are therefore highly desirable. The empirical analysis identifies wages and education as the two main determinants of this type of FDI in the euro area. The quality of business-relevant infrastructure and distance from important industrial centres are also components that boost the proportion of FDI in the tradable sector.

Suggested Citation

  • Maria Demertzis & Peter Pontuch, 2013. "The role of FDI in preventing imbalances in the euro area," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 12(2), pages 17-25, June.
    • Handle: RePEc:euf:qreuro:0122-02
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    File URL: http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea2_focus_2_en.pdf
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    Cited by:

    1. Kellard, Neil M. & Kontonikas, Alexandros & Lamla, Michael J. & Maiani, Stefano & Wood, Geoffrey, 2022. "Risk, financial stability and FDI," Journal of International Money and Finance, Elsevier, vol. 120(C).
    2. Chama CHIPETA & Daniel Francois MEYER, 2018. "Trade Openness, FDI and Exchange Rate Effects on Job Creation in South Africa's Tradable Sectors," Journal of Economics and Behavioral Studies, AMH International, vol. 10(4), pages 197-212.

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