Regional integration and bilateral FDI stocks in the OECD

Abstract

We examine factors affecting OECD bilateral Foreign Direct Investment (FDI) stocks over 1995-2016. We emphasize the effect of regional trade agreements, the European Union (EU) and the North American Free Trade Area (NAFTA). We find that EU membership is a significant determinant of FDI even when we condition on other gravity variables. The importance of robust economic institutions and freedoms is discussed, with implications for countries that are reducing such freedoms. European Integration has raised intra Single Market FDI by over 40%. The UK has no labour market or competitive environment advantage above the rest of the EU in attracting FDI, and it will lose stocks after departure. We show that distance matters, but the effect is declining slowly.

Monetary Integration Effects on Foreign Direct Investments in New EU Member States

“…Considering that there are various indicators of FDI inflows, the dependent variables were selected based on previous empirical research. According to which, it is believed that the most appropriate and commonly used measure of FDI inflows is the total amount of FDI stocks or positions in a selected period (Barrell et al, 2017). The findings that FDI stocks are the most appropriate measure of FDI inflows can be found in the studies by Egger and Merlo (2007), Baltagi et al (2007), Stein andDaude (2007), Cardamone and Scoppola (2015) (in Barrell et al, 2017).…”

“…The list of studies that report negative impacts of exchange rate volatility on FDI inflows includes: Aizenman (1992), , Wei and Choi (2002), Servén (2003), de Sousa andLochard (2004, 2011), Aristotelous (2005), Schiavo (2007, Furceri and Borelli (2008), Schmidt and Broll (2009), Aristotelous andFountas (2012), Kilic at al. (2014), Lily et al (2014), Martins (2015, Cambazoğlu and Güneş (2016), Barrell et al (2017), Pathan (2017) and Sondermann and Vansteenkiste (2019).…”

“…Since aforementioned studies deal with the impact of exchange rates and/or the integration of economies or currency blocs on FDI inflows, we focused on the few studies that are significantly similar to ours: mostly concerning similar samples and research methods. These are especially: Schiavo (2007), Brouwer et al (2008), de Sousa andLochard (2011), Dinga andDingová (2011) and Barrell et al (2017). Schiavo's (2007) study examines the impact of EMU and exchange rate volatility on FDI flows.…”

“…They show a positive and significant correlation between EMU and FDI inflows and a negative correlation between FDI and exchange rate volatility. Barrell et al (2017) examine the impact of bilateral exchange rate volatility on foreign direct investment (FDI) from 14 advanced countries (Austria, Belgium, Canada, France, Germany, Italy, Japan, Korea Republic, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States) relative to other OECD member countries for the period 1995-2012.…”

“…According to which, it is believed that the most appropriate and commonly used measure of FDI inflows is the total amount of FDI stocks or positions in a selected period (Barrell et al, 2017). The findings that FDI stocks are the most appropriate measure of FDI inflows can be found in the studies by Egger and Merlo (2007), Baltagi et al (2007), Stein andDaude (2007), Cardamone and Scoppola (2015) (in Barrell et al, 2017). FDI stocks measure the total amount of direct investment at a given point of time, with FDI stocks classified into inflows and outflows, according to the direction of investment.…”