Financial Integration, Bank Competition and Intra-Eurozone Foreign Direct Investment

The analysis investigates the evolution of investment funding practices in the European Common Currency Area in the aftermath of the Global Financial Crisis and the European Sovereign Debt Crisis. We examine the effect on bilateral Intra-Eurozone foreign direct investment (FDI) posed by the evolving regulation on financial integration in the Eurozone (EZ) and the resurgent shift in bank competition. We disentangle the impact of regional asymmetries among EZ member countries by estimating treatment effects of macroprudential and monetary policy interventions on Intra-EZ FDI in both an unmatched and a matched sample of 12 EZ member countries using standard bipartite matching methods, namely matching by propensity score estimation and the Mahalanobis distance metric. We find that lower bank competition has a significant positive impact on Intra-EZ FDI in the unmatched sample. Furthermore, we assess whether a complementarity exists between financial integration, measured by a proxy reflecting the cost of interbank funds denominated in the same (common) currency, and bank competition, proxied by the Lerner index. Our results report a significant level of reverse causation between treatments, yet at a varied degree among core and periphery EZ countries.