Skip to main content
SpringerLink
Log in

Intra Eurozone Foreign Direct Investment and Deflation

  • Published:
International Advances in Economic Research Aims and scope Submit manuscript

Abstract

After the recent economic turmoil, besides the severe recession that hit most European Union (EU) countries, and the resulting downward trend in inflation, foreign direct investment (FDI) levels in certain EU countries have bounced back. Hence, we evaluate the effect of deflation on intra-Eurozone FDI. Even though deflation tends to cause a negative effect on investment, low production cost opportunities may arise, thus attracting inward FDI. Using panel data that span from 2003 to 2015, we initially estimate an FDI equation that incorporates deflation as a pre-determined variable and, consequently, a two-equation model that treats both FDI and deflation as endogenous variables. Our results suggest that deflation in periphery Eurozone countries does not deter FDI flows from core to periphery Eurozone countries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. For a concise account of the varied definitions of the monetary transmission mechanism channels and the advancements in the literature after the recent economic crisis, see Kokores (2015).

  2. De Grauwe (2014, p. 359) explicitly remarks, “we could, of course, use the definitional equation to derive velocity; but this would not be very sensible as we would then estimate an identity.”

  3. A model is recursive if there exists an ordering of the endogenous variables and an ordering of the equations such that the ith equation describes the determination of the value of the ith endogenous variable during period t as a function of the predetermined variables and of the endogenous variables of index less than i (Malinvaud 1966, p.60).

  4. Baltagi (2005, pp. 237–239) remarks that most panel data equivalent unit root tests suggested in the pertinent literature assume cross-sectional independence, which equivalently affects inference. According to De Hoyos and Sarafidis (2006) cross-sectional dependence may arise due to the presence of common shocks and unobserved components, spatial dependence, and idiosyncratic pairwise dependence in the disturbances with no particular pattern of common components or spatial dependence. Since our data are extracted from a statistical population of member-countries in a currency union, where not only is monetary policy common, but factor mobility is also acute, the need to account for cross-sectional dependence of the errors is considered legitimate enough.

References

  • AMECO (2016). European Commission’s annual macroeconomic data. Available online: http://ec.europa.eu/economy_finance/db_indicators/ameco/zipped_en.htm.

  • Asiedu, E. (2006). Foreign direct Investment in Africa: The role of natural resources, market size, government policy, institutions and political instability. The World Economy, 29(1), 63–77.

    Article  Google Scholar 

  • Baltagi, B.H. (2005). Econometric analysis of panel data. 3rd ed. Wiley: Chichester.

  • Bellak, C., Leibrecht, M., & Stehrer, R. (2008). Policies to attract foreign direct investment: An industry-level analysis. Proceedings of the OECD Global Forum VII on International Investment, OECD Investment Division, 27–28 March.

  • Bevan, A., & Estrin, S. (2004). The determinants of foreign direct investment into European transition economies. Journal of Comparative Economics, 32(4), 775–787.

    Article  Google Scholar 

  • Bloningen, B. A. (2005). A review of the empirical literature on FDI determinants. Atlantic Economic Journal, 33(4), 383–403.

    Article  Google Scholar 

  • Boermans, M. A. (2013). Do exports, FDI and outsourcing in transition countries drive firm-level innovation? Atlantic Economic Journal, 41(2), 197–198.

    Article  Google Scholar 

  • Bordo, M., Landon-Lane, J., & Redish, A. (2010). Deflation, productivity shocks and gold: Evidence from the 1880-1914 period. Open Economies Review, vol., 21(4), 515–546.

    Article  Google Scholar 

  • Borio, C., Erdem M., Filardo, A. J. and Hofmann, B. (2015). The Costs of Deflations: a historical perspective. BIS Quarterly Review (March), pp. 31–54.

  • Brada, J., Kutan, A., & Yigit, T. (2004). The effects of transition and political instability on foreign direct investment inflows: Central Europe and the Balkans. William Davidson Institute Working Paper no 729, University of Michigan, November.

  • Browne, M. W., & Cudeck, R. (1993). Alternative ways of assessing model fit. In K. A. Bollen & J. S. Long (Eds.), Testing structural equation models (pp. 136–162). Sage: Newbury Park, CA.

    Google Scholar 

  • Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy, 23(2), 397–415.

    Article  Google Scholar 

  • Campos, N., Kinoshita, F., & Jan, Y. (2008). Foreign direct investment and structural reforms: Evidence from Eastern Europe and Latin America. IMF Working Paper No. 08/26, International Monetary Fund.

  • De Hoyos, R. E., & Sarafidis, V. (2006). Testing for cross-sectional dependence in panel data models. Stata Journal, vol., 6(4), 482–496.

    Google Scholar 

  • DeGrauwe, P. (2007). European monetary union: A project of promise and risk. In P. L. Cotrell, G. Notaras, & G. Tortella (Eds.), From the Athenian Tetradrachm to the euro: Studies in European monetary integration. Hampshire: Ashgate Publishing Ltd..

    Google Scholar 

  • DeGrauwe, P. (2014). “exchange rates and global financial policies”. World Scientific Studies in International Economics (Vol. 31). Singapore: World Scientific Publishing Co. Ltd..

    Book  Google Scholar 

  • Dunning, J. H., & Lundan, S. M. (2008). Theories of foreign direct investment. In J. H. Dunning & S. M. Lundan (Eds.), Multinational enterprises and the global economy (pp. 79–115). Cheltenham: Edward Elgar Publishing Ltd..

    Google Scholar 

  • ECB Statistical Data Warehouse (2016). Monetary aggregate M3. Available online: http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=117.BSI.M.U2.Y.V.M30.X.I.U2.2300.Z01.A&start=&end=&submitOptions.x=0&submitOptions.y=0&trans=AF.

  • Eurostat (2016). Harmonised index of consumer prices. Available online: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=prc_hicp_aind&lang=en.

  • Gibbard, P., & Stevens, I. (2011). Corporate debt and financial balance-sheet adjustment: A comparison of the United States, the United Kingdom, France and Germany. Annals of Finance vol., 7(1), 95–118.

    Article  Google Scholar 

  • Hausman, J. A. (1978). Specification tests in econometrics. Econometrica vol., 46(6), 1251–1271.

    Article  Google Scholar 

  • Horwitz, S. (2014). The dangers of deflation. Atlantic Economic Journal, 42(2), 143–151.

    Article  Google Scholar 

  • Hu, L., & Bentler, P. M. (1999). Cut-off criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling vol., 6(1), 1–55.

    Article  Google Scholar 

  • Huber, P. J. (1967). The behavior of maximum likelihood estimates under nonstandard conditions. In Vol. 1 of proceedings of the fifth Berkeley symposium on mathematical statistics and probability (pp. 221–233). University of California Press: Berkeley.

    Google Scholar 

  • Kline, R. B. (2011). Principles and practice of structural equation modeling (3rd ed.). NY: Guilford Press.

    Google Scholar 

  • Kokores, I. (2015). Lean-against-the-wind monetary policy: The post-crisis shift in the literature. SPOUDAI Journal of Economics and Business vol., 65(3–4), 66–99.

    Google Scholar 

  • Malinvaud, E. (1966). Statistical methods of econometrics. Amsterdam: North-Holland Publishing Company.

    Google Scholar 

  • Markusen, J. R., & Venãbles, A. J. (1998). Multinational firms and the new trade theory. Journal of International Economics vol., 46(2), 183–203.

    Article  Google Scholar 

  • OECD (2016). Foreign direct investment flows by partner country. Benchmark Definition 3rd and 4th ed. Available online: https://stats.oecd.org/Index.aspx?DataSetCode=FDI_FLOW_PARTNER.

  • Pantelidis, P., Kyrkilis, D., & Nikolopoulos, E. (2012a). Inward FDI flows to Greece: Evidence and determinants. Journal of International Business and Finance vol., 4(2), 185–195.

    Google Scholar 

  • Pantelidis, P., Kyrkilis, D., & Nikolopoulos, E. (2012b). European monetary union and foreign direct investment inflows. SPOUDAI Journal of Economics and Business vol., 62(1–2), 47–55.

    Google Scholar 

  • Pantelidis, P., Kyrkilis, D., & Nikolopoulos, E. (2014). Effects of European monetary integration on intra-EMU foreign direct investment. SPOUDAI Journal of Economics and Business vol., 64(4), 67–74.

    Google Scholar 

  • Prais, S. J., & Winsten, C.B. (1954). Trend Estimators and Serial Correlation. Cowles Commission Discussion Paper No. 383 (Chicago).

  • Stata. (2013). STATA structural equation modeling: Reference manual. Stata press publication. StataCorp LP: Texas.

    Google Scholar 

  • Trevino, L. J., Thomas, D. E., & Cullen, J. (2008). The three pillars of institutional theory and FDI in Latin America: An institutionalization process. International Business Review, 17(1), 118–133.

    Article  Google Scholar 

  • Vernon, R. (1966). International investment and international trade in the product cycle. Quarterly Journal of Economics vol., 80(2), 190–207.

    Article  Google Scholar 

  • Vijayakumar, N., Sridharan, R., & Rao, K. C. (2010). Determinants of FDI in BRICS countries: A panel analysis. International Journal of Business Science and Applied Management, 5(3), 1–13.

    Google Scholar 

  • White Jr., H. L. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica vol., 48(4), 817–838.

    Article  Google Scholar 

  • White Jr., H. L. (1982). Maximum likelihood estimation of Misspecified models. Econometrica,50(1), 1–25.

    Article  Google Scholar 

  • WIPO (2016). Patent applications. Available online: http://data.worldbank.org/indicator/IP.PAT.RESD.

Download references

Acknowledgements

The authors gratefully acknowledge that the publication of this paper has been partly supported by the University of Piraeus Research Center. We have benefited greatly from constructive comments by the editor and an anonymous referee of International Advances in Economic Research, Ana Paula Africano, Sophocles Brissimis, Bernard Beaudreau, Sean Holly, Angelos Kanas, Taxiarchis Kokores, Felipa de Mello-Sampayo and participants at the 81st International Atlantic Economic Conference, Lisbon, March 2016. The authors are solely responsible for any remaining errors and omissions.

Author information

Authors and Affiliations

  1. Department of Economics, University of Piraeus, 185 34, Piraeus, Greece

    Ioanna Τ. Kokores, Constantina Kottaridi & Pantelis Pantelidis

Authors
  1. Ioanna Τ. Kokores
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Constantina Kottaridi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Pantelis Pantelidis
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ioanna Τ. Kokores.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Kokores, I.Τ., Kottaridi, C. & Pantelidis, P. Intra Eurozone Foreign Direct Investment and Deflation. Int Adv Econ Res 23, 217–229 (2017). https://doi.org/10.1007/s11294-017-9629-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11294-017-9629-9

Keywords

JEL Classification

Search

Navigation