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Currency Union and Investment Flows: Estimating the Euro Effect on FDI

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Abstract

This paper studies the effect of the euro introduction on international FDI flows. Using country-pair data on 35 OECD economies during 1997-2008 and adopting the propensity score matching as identification strategy, we investigate the impact of the euro on capital reallocation. In general, the euro exhibits no significant impact on FDI. However, the effect becomes significant on the subset of EU countries, increasing FDI flows by 14.3 to 42.5 percent. Furthermore, we find that the EU membership fosters FDI flows much more than the euro, increasing FDI flows by 55 to 166 percent. Among other FDI determinants, high gross domestic product, low distance between countries and low unit labor costs in target country have a positive effect on FDI. On the contrary, long-term exchange rate volatility deters FDI flows.

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  • Marián Dinga & Vilma Dingová, 2011. "Currency Union and Investment Flows: Estimating the Euro Effect on FDI," Working Papers IES 2011/25, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2011.
    • Handle: RePEc:fau:wpaper:wp2011_25
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    2. Sánchez, Elmer, 2013. "Grado de inversión y flujos de inversión directa extranjera a economías emergentes," Working Papers 2013-010, Banco Central de Reserva del Perú.
    3. Xenia Florentina Radu, 2013. "The Euro Impact on Foreign Direct Investment in EMU Countries," Working Papers 2, Bucharest Academy of Economic Studies, Research Center in International Business and Economics (RCIBE).
    4. Cuneyt KILIC & Y lmaz BAYAR & Feyza ARICA, 2014. "Effects of Currency Unions on Foreign Direct Investment Inflows: The European Economic and Monetary Union Case," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 8-15.
    5. Selahattin GURIS & Irem SACAKLI SACILDI & Elif GUNEREN GENC, 2015. "Determining the Effects of Factors on FDI in Global Crisis Period," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 1-10.

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    More about this item

    Keywords

    monetary union; foreign direct investment; common currency area; euro;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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