International Financial Competitiveness and Incentives to Foreign Direct Investment

International financial integration has become an important factor for economic performance in the globalisation process. Access to international capital markets is crucial for a country’s ability to meet its financial needs and to keep up with the challenges of a changing global landscape. In this paper, “financial competitiveness” is interpreted as the attractiveness of a country as perceived by foreign investors, which is reflected in refinancing costs in international capital markets. The study concentrates on foreign direct investment (FDI), which is an essential feature of the globalisation process and has immediate implications for the real economy. An index of international financial competitiveness is calculated which is given by the ratio of the market value to the book value of inward FDI stocks. For a panel of five advanced economies from 1980 to 2006 it is shown that price competitiveness, stable inflation rates and registered patents have a positive impact on the index. Institutional factors like EMU membership or Anglo-American legislation also play a role. Financial competitiveness in turn encourages FDI inflows whereas it benefits fixed investment relative to M&A. There is also some evidence that an innovative environment accelerates investment decisions by promoting competition among investors.