Did the Euro Change the Nature of FDI Flows among Member States?

37 Pages Posted: 3 May 2019

See all articles by David Sondermann

David Sondermann

European Central Bank (ECB)

Isabel Vansteenkiste

European Central Bank (ECB)

Date Written: April 30, 2019

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.

Keywords: foreign direct investment, euro, economic structures, institutions, euro area countries

JEL Classification: F21, F23, F45, O43

Suggested Citation

Sondermann, David and Vansteenkiste, Isabel, Did the Euro Change the Nature of FDI Flows among Member States? (April 30, 2019). ECB Working Paper No. 2275 (2019); ISBN 978-92-899-3537-1 . Available at SSRN: https://ssrn.com/abstract=3381695

David Sondermann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Isabel Vansteenkiste (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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