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Is energy market integration a green light for FDI?

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  • Maria T. Costa-Campi, Jordi Paniagua, and Elisa Trujillo

Abstract

This paper contributes to a better understanding of the effects of the European single market strategy by studying the effect of energy market integration (EMI) on foreign direct investment (FDI). Enforcing an EMI diminishes energy uncertainty and price volatility and signals stronger and credible institutions. FDI may, as a result, increase both within and outside the EMI area through two channels: first, via energy price converge and, second, via price dispersion reduction. We develop a formal model to explain how these mechanisms affect the capital invested abroad by heterogeneous firms. The Iberian Electricity Market (MIBEL) integration of 2007 is used to quantify the effect of EMI on FDI empirically. Gravity estimates on a global dataset including bilateral FDI data show that the integration of Portugal and Spain's electricity market increased both the amount of FDI's participants and the number of foreign projects. In line with our theoretical expectations, our estimates show that the increase of FDI is mainly due to the reduction in price dispersion. However, the institutional credibility signal sent by MIBEL had a greater influence than expected by the actual price reduction. Furthermore, we also observe a positive increase in FDI from neighboring countries (in this instance, France), albeit lower in magnitude.

Suggested Citation

  • Maria T. Costa-Campi, Jordi Paniagua, and Elisa Trujillo, 2018. "Is energy market integration a green light for FDI?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    • Handle: RePEc:aen:journl:ej39-si1-paniagua
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    References listed on IDEAS

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    1. Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
    2. Jordi Paniagua & Juan Sapena, 2015. "Do credit constraints reduce foreign jobs? A note on foreign direct employment," Applied Economics Letters, Taylor & Francis Journals, vol. 22(3), pages 195-198, February.
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    Cited by:

    1. Ke-Liang Wang & Rui-Rui Zhu & Yun-He Cheng, 2022. "Does the Development of Digital Finance Contribute to Haze Pollution Control? Evidence from China," Energies, MDPI, vol. 15(7), pages 1-21, April.
    2. Ana Cuadros & Antonio Navas & Jordi Paniagua, 2022. "Moving ideas across borders: Foreign inventors, patents and FDI," The World Economy, Wiley Blackwell, vol. 45(12), pages 3652-3678, December.
    3. Intini, Mario & Waterson, Michael, 2023. "Strategic behaviour by wind generators: An empirical investigation," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    4. Costa-Campi, Maria Teresa & Davi-Arderius, Daniel & Trujillo-Baute, Elisa, 2021. "Analysing electricity flows and congestions: Looking at locational patterns," Energy Policy, Elsevier, vol. 156(C).
    5. Costa-Campi, Maria Teresa & Davi-Arderius, Daniel & Trujillo-Baute, Elisa, 2020. "Locational impact and network costs of energy transition: Introducing geographical price signals for new renewable capacity," Energy Policy, Elsevier, vol. 142(C).

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