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Source and host country volatility and FDI: A gravity analysis of European investment to Middle East and North Africa

Author

Listed:
  • Dalila Nicet-Chenaf

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)

  • Eric Rougier

    (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)

Abstract

Macroeconomic determinants of FDI are seldom analyzed from the perspective of source countries, priority being generally given to host country characteristics. In a gravity set-up, we analyze FDI flows from European Union to MENA economies. We find that European investment to our MENA host countries is higher, the lower the source country output volatility, thereby supporting the existence of an income effect for European Transnational corporations. In the case of MENA economies, source country output volatility's adverse impact on FDI is counterbalanced by the positive attraction effect of domestic swings of activity. We also find that 1995's Barcelona agreement has reinforced MENA countries' vulnerability to European short- and medium-term macroeconomic cycles. The emergence of non-traditional sources of European FDI is, however, a positive evolution since Eastern and Central European investment to MENA countries is less sensitive to host and source country macroeconomic volatility that traditional Western and southern European sources tend to be. Our results are robust to various changes in estimator, sample composition or measurement of instability.

Suggested Citation

  • Dalila Nicet-Chenaf & Eric Rougier, 2014. "Source and host country volatility and FDI: A gravity analysis of European investment to Middle East and North Africa," Working Papers hal-00985795, HAL.
  • Handle: RePEc:hal:wpaper:hal-00985795 Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00985795
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    Keywords

    Output volatility; Inflation; FDI; gravity model; source countries; European Union; MENA;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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