Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2004:5: The Effect of the Euro on Foreign Direct Investment

Pavlos Petroulas ()
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Pavlos Petroulas: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

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 and fixed effects with common time controls. The estimated results of the latter approach show that the introduction of the Euro raises inward FDI by 17 percent within the Euro-area and by 9 and 12 percent to and from non-member countries respectively. 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-codes: C23; F02; F21

36 pages, May 24, 2004

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