Did the Euro Change the Nature of FDI Flows among Member States?
37 Pages Posted: 3 May 2019
Date Written: April 30, 2019
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.
Keywords: foreign direct investment, euro, economic structures, institutions, euro area countries
JEL Classification: F21, F23, F45, O43
Suggested Citation: Suggested Citation