The effect of the euro on foreign direct investment

Petroulas, Pavlos

doi:10.1016/j.euroecorev.2006.10.005

Cited by 83 publications

(69 citation statements)

References 30 publications

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“…There is considerable evidence that currency unions affect FDI, although much of the research has focused on Europe only (see e.g., Petroulas, 2007 andBaldwin et al, 2008 (Blonigen, 2002). To separate trade effects that arise within and between RTAs, Eicher, Henn, and Papageorgiou (2008) highlight the importance of controlling for all possible individual RTAs rather than including just one average catch-all RTA effect.…”

Section: Existing Empirical Approaches and Candidate Regressorsmentioning

confidence: 99%

Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias

Eicher

Helfman

Lenkoski

2012

Journal of Macroeconomics

102

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The literature on Foreign Direct Investment (FDI) determinants is remarkably diverse in terms of competing theories and empirical results. We utilize Bayesian Model Averaging (BMA) to resolve the model uncertainty that surrounds the validity of the competing FDI theories. Since the structure of existing FDI data is well known to induce selection bias, we extend BMA theory to HeckitBMA in order to address model uncertainty in the presence of selection bias. We show that more than half of the previously suggested FDI determinants are not robust and highlight theories that do receive robust support from the data. Our selection approach allows us to identify the determinants of the margins of FDI (intensive and extensive), which are shown to differ profoundly. Our results suggest a new emphasis in FDI theories that explicitly identify the dynamics of the intensive and extensive FDI margins.* We thank an anonymous referee, Christian Lorenczik, Monique Newiak, and Chris Papageorgiou for helpful suggestions. Assaf Razin and Hui Tong kindly shared their data. Lenkoski gratefully acknowledges support by the joint research project "Spatio/Temporal Graphical Models and Applications in Image Analysis" funded by the German Science Foundation (DFG), grant GRK 1653 as well as the MAThematics Centre Heidelberg (MATCH). Eicher thanks Max Soto Jimènez, the Instituto de Investigaciones en Ciencias Económicas, and the Department of Economics at the University of Costa Rica for their support and hospitality during the preparation of this paper. 1 IntroductionGlobal HeckitBMA reveals not only the determinants of the intensive and extensive margins of FDI ("the volume of investment flows" and "the decision to invest", respectively), it also permits us to estimate FDI determinants without having to constrain parameter estimates to be identical across both margins. There is no reason to suspect that the margins of FDI should feature identical determinants, nor that the same determinant has the identical impact for both margins. Our selection criterion is based on Razin,Rubinstein and Sadka (2004), who note that FDI involves fixed costs that give rise to two-part decisions: a marginal productivity condition that determines how much to invest, and a total profitability condition that indicates whether or not to invest abroad. Previous studies have confirmed the relevance of such FDI fixed costs. 4Our results show that the impact of model uncertainty on FDI estimates is substantial and that the Heckman selection methodology is necessary to obtain unbiased and consistent estimates. In the absence of explicit controls for model uncertainty, the conventional Heckit procedure suggests nearly three times as many FDI determinants asHeckitBMA at the extensive margin (32 vs 13) and a 50% more regressors at the intensive margin. This is not surprising, since Heckit is not designed to consider models associated with alternative theories. Instead, HeckitBMA discovers much more parsimonious models of FDI that score better as measured by the Bayesian I...

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Section: Existing Empirical Approaches and Candidate Regressorsmentioning

confidence: 99%

Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias

Eicher

Helfman

Lenkoski

2012

Journal of Macroeconomics

102

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“…Previous studies have investigated the effect of the EMU on a whole range of economic indicators, such as trade (Baldwin, 2006;Baldwin et al, 2008;Bun and Klaassen, 2007;Micco et al, 2003), foreign direct investment (De Sousa and Lochard, 2011;Petroulas, 2007), cross-border banking (Blank and Buch, 2007;Coeurdacier and Martin, 2009;Spiegel, 2009), real exchange rates (El-Shagi et al, 2016), GDP per capita (Fernández and Perea, 2015), and wage growth and unemployment (Grüner, 2010;Mikosch and Sturm, 2012). Mongelli and Vega (2006) provide an overview of the early literature on the effects of the EMU on economic performance, financial structures and product and labor market institutions.…”

Section: Literature Review: the Emu And Current Account Balancesmentioning

confidence: 99%

Estimating the effect of the EMU on current account balances: A synthetic control approach

Hope

2016

European Journal of Political Economy

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The European sovereign debt crisis wrought major political and economic damage on the European Monetary Union (EMU). This led to a reassessment of the pre-crisis period of economic growth and stability in the EMU, shifting attention to the macroeconomic imbalances that emerged between member states, especially those in current account balances. This paper uses macroeconomic data on OECD economies and a new statistical approach for causal inference in observational studies-the synthetic control method-to estimate the effect of the EMU on the current account balances of individual member states. This 'counterfactuals' approach provides strong evidence that the introduction of the EMU was responsible for the divergence in current account balances among member states in the run-up to the euro crisis. The results suggest that the EMU effect operated through multiple channels and that fundamental changes to the institutional framework of the EMU may be required to safeguard the currency union against a reemergence of dangerous external imbalances in the future.

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“…All three interviewees acknowledged that while their respective organisations had located in Ireland prior to its decision to join the Euro zone in 1999 and the subsequent introduction of the Euro in 2002, their organisations had reaped considerable benefits as a result of that decision. Similar to the view of Petroulas [49], the three interviewees noted that the main advantages of Euro zone membership were the elimination of currency exchange risk with other Euro zone countries and a reduction in transaction costs. This elimination of exchange rate uncertainty within the Euro area, according to interviewee S, allowed for greater focus on interest rates rather than the risk associated with borrowing or lending across national borders.…”

Section: Resultsmentioning

confidence: 79%

Ireland’s Foreign Direct Investment Sector: the Impact of a hypothetical Irish Euro zone exit

Campa¹,

Cull²

2013

BEJ

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The European sovereign debt crisis that has been playing out since 2008 has lead too much questioning over the future of the single currency which, so far, favoured foreign direct investment (FDI) in countries such as Ireland, contributing to their wellbeing and growth. Drawing on data gathered from interviews with individuals involved in different divisions of the FDI sector, namely the services, high-tech and life sciences, this study evaluates the hypothetical consequences for Ireland's FDI sector, following an Irish Euro zone exit. The findings illustrate that the reactions of foreign companies would heavily depend on the ease of transferability in the organisation's operations. Ireland outside the Euro zone would struggle to both maintain and attract new FDI. The resultant consequences for Ireland's economy would include increased unemployment, reduced exchequer returns and export levels, as well as stagnant economic growth.

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The effect of the euro on foreign direct investment

Cited by 83 publications

References 30 publications

Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias

Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias

Estimating the effect of the EMU on current account balances: A synthetic control approach

Ireland’s Foreign Direct Investment Sector: the Impact of a hypothetical Irish Euro zone exit

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