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Did the euro change the nature of FDI flows among member states?

Author

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  • Sondermann, David
  • Vansteenkiste, Isabel

Abstract

In this paper we investigate the impact of the euro integration process on the drivers of FDI inflows. We show theoretically and empirically that the single currency alters the drivers of FDI inflows across its Member States. Estimating bilateral gravity models of FDI inflows into euro area countries, we show that the euro facilitates intra-euro area vertical FDI flows but reduces incentives for horizontal or market seeking FDI. Instead, horizontal FDI flows stemming from investor countries located outside the monetary union increase. Such flows are however not more likely be directed towards euro area countries with larger domestic markets but rather to countries that are close to large euro area markets and that have higher quality institutions. Overall, these results suggest that while the euro has been beneficial to FDI inflows into the monetary union, the impact differs significantly across countries. The global financial crisis does not change our main findings. Our results are robust to various economic specifications. JEL Classification: F21, F23, F45, O43

Suggested Citation

  • Sondermann, David & Vansteenkiste, Isabel, 2019. "Did the euro change the nature of FDI flows among member states?," Working Paper Series 2275, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20192275
    Note: 943715
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    References listed on IDEAS

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    Cited by:

    1. Dellis, Konstantinos & Sondermann, David & Vansteenkiste, Isabel, 2022. "Drivers of genuine FDI inflows in advanced economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 407-419.
    2. Giovanni Cerulli & Silvia Nenci & Luca Salvatici & Antonio Zinilli, 2022. "Currency Unions and Global Value Chains: The Impact of the Euro on the Italian Value Added Exports," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(2), pages 373-407, July.
    3. Randolph Luca Bruno & Nauro Ferreira Campos & Saul Estrin, 2021. "The Effect on Foreign Direct Investment of Membership in the European Union," Journal of Common Market Studies, Wiley Blackwell, vol. 59(4), pages 802-821, July.
    4. 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).
    5. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2022. "Which are the long-run determinants of US outward FDI? Evidence using large long-memory panels," Working Papers 2022.08, International Network for Economic Research - INFER.
    6. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2019. "Searching The Us Fdi Determinants In The Eu: Is There A Euro Effect?," Working Papers 1916, Department of Applied Economics II, Universidad de Valencia.
    7. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2021. "Is there a euro effect in the drivers of US FDI? New evidence using Bayesian model averaging techniques," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(4), pages 881-926, November.
    8. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2022. "A fresh assessment of the euro effect on outward US FDI," Working Papers 2209, Department of Applied Economics II, Universidad de Valencia.
    9. Ray Barrell & Abdulkader Nahhas, 2022. "Regional integration and bilateral FDI stocks in the OECD," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3032-3050, July.

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    More about this item

    Keywords

    economic structures; euro; euro area countries; Foreign direct investment; institutions;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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