The Impact of the Financial and Economic Crisis on EU's FDI

Following a five-year period of uninterrupted growth and reaching a historical peak in 2007, world foreign direct investment flows (FDI) declined in 2008, in large part as a result of the global financial and economic crisis. The European Union (EU) as a major source and recipient of FDI flows in the world has been particularly badly hit, reflecting the close economic relationship which exists between the EU and the rest of the world, on the one hand, and among the Member States, on the other hand. The paper analyses the impact of the current crisis on EU's FDI inflows and outflows, in terms of dynamics and volume, as well as the short term and long-term prospects for FDI. Special attention is devoted to disentangling the transmission channels of the crisis, the key features of the FDI downturn and its underlying factors. The empirical investigation relies on UNCTAD data for tracing the evolution of FDI flows at the European level as compared to worldwide trends, while Eurostat data are used to highlight the impact of the crisis on intra-EU FDI flows. Whenever possible, a distinctive analysis is carried out for the old and new EU Member States. The paper is organized around six sections. Its findings reveal, inter alia, that notwithstanding the sharp fall in total FDI flows in 2008, the EU maintains its position as a global leader in terms of FDI flows. However, it will take quite a long time until recovering from the negative effects of the present crisis in terms of investments. Besides, the EU is not likely to be the driving force behind the next wave of FDI surge in the world as this role will be taken over by emerging economies like China, India and Brazilia.