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Common currencies and FDI flows

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  • Stefano Schiavo

Abstract

The paper investigates the impact of EMU on foreign direct investment flows. Using the option value approach to investment decisions, it is possible to show that exchange rate uncertainty hinders cross-border investment flows. By permanently fixing bilateral exchange rates, a currency union can then be expected to spur international investment. Results from a gravity model on a sample of OECD countries confirm the hypothesis that currency unions have a positive impact on FDI; moreover, adopting the same currency appears to do more than merely eliminating exchange rate volatility. These findings closely resemble those recently obtained in the trade literature. Copyright 2007 , Oxford University Press.

Suggested Citation

  • Stefano Schiavo, 2007. "Common currencies and FDI flows," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 536-560, July.
  • Handle: RePEc:oup:oxecpp:v:59:y:2007:i:3:p:536-560
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    References listed on IDEAS

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    1. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
    2. Rose, Andrew K & Engel, Charles, 2002. "Currency Unions and International Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 1067-1089, November.
    3. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, April.
    4. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, July.
    5. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
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    Cited by:

    1. repec:eee:jimfin:v:77:y:2017:i:c:p:143-163 is not listed on IDEAS
    2. Nicolas Coeurdacier & Roberto A. De Santis & Antonin Aviat, 2009. "Cross-border mergers and acquisitions and European integration," Economic Policy, CEPR;CES;MSH, vol. 24, pages 55-106, January.
    3. De Santis, Roberto A. & Coeurdacier, Nicolas & Aviat, Antonin, 2009. "Cross-Border Mergers and acquisitions: Financial and institutional forces," Working Paper Series 1018, European Central Bank.
    4. Miriam Camarero & Estrella Gómez-Herrera & Cecilio Tamarit, 2017. "New evidence on Trade and FDI: how large is the Euro effect?," Working Papers 1709, Department of Applied Economics II, Universidad de Valencia.
    5. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
    6. Michela Redoano, 2007. "Fiscal Interactions Among European Countries. Does the EU Matter?," CESifo Working Paper Series 1952, CESifo Group Munich.
    7. Nicolas Coeurdacier & Roberto A. De Santis & Antonin Aviat, 2009. "Cross-border mergers and acquisitions and European integration," Post-Print hal-01022660, HAL.
    8. Anokye M. Adam, 2013. "Currency Union and Foreign Direct Investment Inflow: Evidence from Economic Community of West African States (ECOWAS)," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 63(1-2), pages 121-132, June.
    9. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, vol. 44(3), pages 1087-1111, June.
    10. Jaroslava Hečková & Alex. Chapčáková & Eva Litavcová, 2016. "Ekonomická integrácia a jej vplyv na cezhraničné fúzie a akvizície v európskom priestore
      [Economic Integration and Its Influence on Cross-Border Mergers and Acquisitions within the European Area]
      ," Politická ekonomie, University of Economics, Prague, vol. 2016(1), pages 19-33.
    11. Kyriacos Aristotelous & Stilianos Fountas, 2012. "What is the Impact of Currency Unions on FDI Flows? Evidence from Eurozone Countries," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 10(2), pages 87-98.
    12. Michele Sabatino, 2016. "The de-industrialization process in South Italy and the new industrial policies in Europe," ERSA conference papers ersa16p885, European Regional Science Association.
    13. Cuneyt KILIC & Yýlmaz BAYAR & Feyza ARICA, 2014. "Effects of Currency Unions on Foreign Direct Investment Inflows: The European Economic and Monetary Union Case," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 8-15.
    14. Anokye M. Adam, 2013. "Currency Union And Foreign Direct Investment Inflow: Evidence From Economic Community Of West African States (Ecowas)," Far East Journal of Psychology and Business, Far East Research Centre, vol. 11(5), pages 73-81, May.
    15. Selahattin GURIS & Irem SACAKLI SACILDI & Elif GUNEREN GENC, 2015. "Determining the Effects of Factors on FDI in Global Crisis Period," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 1-10.
    16. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g70aj72cl is not listed on IDEAS
    17. Redoano, Michela, 2014. "Tax competition among European countries. Does the EU matter?," European Journal of Political Economy, Elsevier, vol. 34(C), pages 353-371.

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