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Tariffs and EU countries foreign direct investment: Evidence from a dynamic panel model

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  • Paola Cardamone
  • Margherita Scoppola

Abstract

According to the models of the multinational enterprise tariffs play a fundamental role in determining the pattern of foreign direct investment (FDI). The aim of this paper is to assess the impact of tariffs on the outward stocks of FDI of the European Union (EU). We estimate a model based on the knowledge-capital theory of the multinational enterprise over the period 1995-2008 by using a sample of five EU countries and 24 partner countries. We consider, first, manufacturing sector as a whole and, then, six manufacturing industries defined at the two-digit level of the Nomenclature statistique des activités économiques dans la Communauté européenne (NACE) classification. Explanatory variables include an index of applied bilateral tariffs and a dummy to capture the presence of bilateral investment treaties (BITs). A dynamic panel model is estimated through the generalized method of moments estimator, taking also into account the endogeneity of regressors. The results show that the pattern of EU outward FDI is a mix of vertical and horizontal FDI. BITs in force have a significant and positive impact on the outward FDI. The impact of tariffs varies across industries and countries, suggesting the predominance of horizontal FDI in some industries, and the existence of vertical FDI in others.

Suggested Citation

  • Paola Cardamone & Margherita Scoppola, 2015. "Tariffs and EU countries foreign direct investment: Evidence from a dynamic panel model," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(1), pages 1-23, February.
    • Handle: RePEc:taf:jitecd:v:24:y:2015:i:1:p:1-23
    DOI: 10.1080/09638199.2013.871742
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    References listed on IDEAS

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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
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    1. Adriana Burlea‐Schiopoiu & Simina Brostescu & Liviu Popescu, 2023. "The impact of foreign direct investment on the economic development of emerging countries of the European Union," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 2148-2177, April.
    2. Barrell, Ray & Nahhas, Abdulkader, 2018. "Economic integration and bilateral FDI stocks: the impacts of NAFTA and the EU," LSE Research Online Documents on Economics 90372, London School of Economics and Political Science, LSE Library.
    3. Popescu Liviu & Brostescu Simina & Sitnikov Catalina & Vasilescu Laura, 2023. "Determinants of FDI Stock in Some Central European Countries," JRFM, MDPI, vol. 16(3), pages 1-31, March.
    4. Curran, Louise & Lv, Ping & Spigarelli, Francesca, 2017. "Chinese investment in the EU renewable energy sector: Motives, synergies and policy implications," Energy Policy, Elsevier, vol. 101(C), pages 670-682.
    5. Josef C. Brada & Zdenek Drabek & Ichiro Iwasaki, 2021. "Does Investor Protection Increase Foreign Direct Investment? A Meta‐Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 35(1), pages 34-70, February.
    6. La-Bhus Fah Jirasavetakul & Jesmin Rahman, 2018. "Foreign Direct Investment in New Member State of the EU and Western Balkans: Taking Stock and Assessing Prospects," IMF Working Papers 2018/187, International Monetary Fund.

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