The Euro's Effect on Foreign Direct Investment : An econometric study of the euro’s effect on inward foreign direct investment

• Main Authors: Bergström Koustas, Oskar, Burns, Lucas
• Format: Others
• Language: English
• Published: Linköpings universitet, Nationalekonomi 2019
• Subjects: Foreign Direct Investment; Direct Investment; Euro; Euro's Effect; Economics; Nationalekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-157993

The aim of this thesis is to analyse if the euro has had any significant effect on the inflow of foreign direct investments. Our purpose is answered by developing an econometric model with inflow of foreign direct investments as the dependent variable. The model is estimated with the ordinary least squares method and panel data from ten different countries, five which have adopted the euro as their currency and five which have not. The data collected concerns the timeframe from 1994 to 2007. The theoretical background is retrieved mainly from journal articles that have conducted similar research of how a common currency has affected foreign direct investments. We use these studies as a base for developing our regression model and also as a foundation for our analysis. The results from this thesis show that the euro has had a large significant effect on foreign direct investments which we see by analysing the interaction variable in our regression. Furthermore, the results show that trade openness and GDP have the largest significant effect on FDI, meanwhile unit labour cost and exchange rate volatility had no significant effect at all. We conclude that the euro has a positive significant effect on inward foreign direct investment. Although the model suggests that having adopted the euro in 1999 would yield a 58.4 per cent increase in inward FDI compared to countries that kept their own currency, we are uncertain of the effect’s actual magnitude due to concern that we read some effects from the single market in the variable we use to estimate the euro’s effect.