The Effect of the Euro on

Foreign Direct Investment

Pavlos Petroulas

Bank of Greece

Abstract

In this paper the recent effect of the European Monetary Union on inward FDI-flows is examined. We use a difference-in-differences approach for both a gravity based- as well as a general equilibrium approach. The estimated results show that the introduction of the euro raises inward FDI by 14 to 16 percent within the euro area by 11 to 13 percent from non-member and weakly by 8 percent to non-member countries. Moreover the geographical effects of the euro are explored. The results show partial agglomeration tendencies for the euro area. There are also some indications of increased importance of vertical specialization in the sample.

Keywords: Foreign Direct Investment, EMU, Panel Data

JEL Classification:  F21, F0, C23

Acknowledgements: I am thankful to Rikard Forslid, Mårten Palme, Karolina Ekholm, Peter Skogman-Thoursie, Mahmood Arai, Matthew Lindquist, Per Pettersson-Lidbom and Heather Gibson for useful comments and suggestions. I am also grateful to Paolo Passerini from Eurostat for his help and suggestions. Last but not least I am grateful to Harry Flam and Håkan Nordström for sharing their data. The views expressed in this paper do not necessarily reflect those of the Bank of Greece.

Correspondence:

Pavlos Petroulas,

Economic Research Department,

Bank of Greece, 21 E. Venizelos Ave.,

102 50 Athens, Greece,

Tel. +30210-320 2643

Email: ppetroulas@bankofgreece.gr