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The Public Finances, Bank Credit, And Foreign Direct Investment: Evidence From European Union Countries

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  • CHIRILĂ, Ioan

    (Doctoral School of Finance, Bucharest University of Economic Studies, Romania.)

Abstract

This study explores the macroeconomic and financial determinants of Foreign Direct Investment (FDI) inflows in the 27 European Union member states over the period 2005–2023. Using a dynamic panel specification, we assess the influence of domestic demand, fiscal stance, political stability, and credit conditions on FDI dynamics. The results indicate that lagged FDI, GDP growth, household consumption, and political stability significantly enhance FDI inflows, while inflation is not a significant driver. Public debt and fiscal deficits are associated with reduced FDI, pointing to the importance of macro-financial stability. Of particular interest is the role of bank credit, which shows a positive and marginally statistically significant effect on FDI. This finding suggests that improved access to domestic credit may lower entry costs, increase investor confidence, and facilitate integration into local value chains. The analysis underscores the complementary relationship between financial intermediation and foreign investment, providing empirical support for policies aimed at strengthening banking sector depth as part of FDI attraction strategies.

Suggested Citation

  • CHIRILĂ, Ioan, 2025. "The Public Finances, Bank Credit, And Foreign Direct Investment: Evidence From European Union Countries," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 29(4), pages 84-97, December.
    • Handle: RePEc:vls:finstu:v:29:y:2025:i:4:p:84-97
    DOI: https://doi.org/10.65672/fs.2025.4.5
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    References listed on IDEAS

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    1. Iamsiraroj, Sasi & Ulubaşoğlu, Mehmet Ali, 2015. "Foreign direct investment and economic growth: A real relationship or wishful thinking?," Economic Modelling, Elsevier, vol. 51(C), pages 200-213.
    2. Gema Fabro & José Aixalá, 2012. "Direct and Indirect Effects of Economic and Political Freedom on Economic Growth," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(4), pages 1059-1080.
    3. Korzeb, Zbigniew & Niedziółka, Paweł & Nistor, Simona, 2023. "Sovereign creditworthiness and bank foreign ownership. An empirical investigation of the European banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
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    More about this item

    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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