Who Gains from Services FDI—Host or Home Economies? An Analysis of Disaggregated Services FDI Inflows and Outflows of 24 European Economies

Abstract

This study focuses on a sample of 24 European economies to examine the spillovers from disaggregated services foreign direct investment (FDI) on economic growth. We study the impact of 20 disaggregated services FDI inflows and outflows, respectively, on their host and home country services sector and overall growth. We find that both financial services and business services FDI are beneficial for growth in both host and home countries. Financial services FDI works though financial holding companies and home countries benefit especially from investment in foreign banks, which provides access to credit. Business services FDI works though management holding companies and home countries benefit, especially from investment in computer activities, which provides access to specialised human capital and high-value knowledge assets. The positive spillovers to home countries provide evidence for arguing against protectionism. JEL Codes: F2, F21, F43

FDI: Hot or Cold Money? The Behaviour of Sectoral FDI Inflows and Outflows Over Periods of Growth Accelerations and Decelerations

“…Most countercyclical behaviour is due to foreigner enterprises buying assets in the host country when assets are relatively cheap. These results are consistent with Doytch (2015, 2021b). The rest of the FDI inflows tend to behave neutrally with respect to periods of growth accelerations and decelerations.…”

“…Democratic accountability also appears to have a significant effect on manufacturing and overall FDI inflows (Table 2.1) The investment profile is a significant determinant of inward trade FDI and total FDI as well (Table 3.1). The above results are broadly consistent with Doytch and Ashraf (2021), who examine a narrow sample of developed European economies and test for differential effects of institutions on inward greenfield FDI and mergers and acquisitions (M&A) FDI.…”

“…Finally, Doytch and Ashraf (2021) test the impact of different institutional quality indicators on the two modes of FDI- greenfield investment and cross-border mergers and acquisitions. The results point out that good institutional conditions for attracting greenfield FDI to developing countries require law and order, a good investment climate and a good state of democracy, but not necessarily tight control of corruption and a stable government, while cross-border mergers and acquisitions to developing countries require strong law and order, good investment conditions, strict control of corruption and strong democratic accountability.…”

“…However, the COVID-19 crisis takes place in a world that is even more interconnected than the environment during the Global Financial Crisis. There is more integration via global supply chains, international trade, movement of people, as well as better integration through internet and telecommunication technologies (Doytch et al, 2021). Therefore, better global integration may lead to a more pronounced effect of a prolonged economic deceleration, or a prolonged economic acceleration, if the world economies manage to stimulate strong recoveries from the COVID-19 crisis.…”

“…Second , we propose to account for the sectoral distribution of FDI in the analysis. The sector level of analysis has been important in identifying the productivity spillovers of FDI (Doytch, 2021a; Doytch & Uctum, 2011, 2019). We ask questions about the cyclicality of FDI at the sector level.…”