Is there a euro effect in the drivers of US FDI? New evidence using Bayesian model averaging techniques

Abstract

In this paper we analyze the potential determinants of US outward FDI stock with a particular focus on the euro effect during the period 1985-2017. To this aim, we consider a large set of candidate variables suggested both theory and previous empirical analysis. We select the covariates using Bayesian Model Averaging (BMA), a data-driven methodology. Our sample includes a total of 56 host countries, that represent around the 70% of US outward FDI stock. We study the role of the euro on American FDI both in Europe and the rest of the world. In Europe, we consider various country groups: the European Union (EU), the Euro Area (EA), as well as core and periphery within this last group. We conclude that many variables studied by previous FDI literature cannot be considered robust determinants. Moreover, US OFDI is explained by both horizontal and vertical motives. However, HFDI strategies predominate in EA core countries, whereas VFDI prevails in the periphery. As for the euro effect, the common currency seems to have played an important role encouraging US FDI, being a crucial element in the convergence of EA periphery to its core. In addition, our results indicate that the adoption of the euro has favoured VFDI to the detriment of HFDI.