Foreign direct investment inflows determinants in four South European economies

Abstract

Foreign direct investment (FDI) has attracted research interest due to its impact on economic growth, especially during periods of crisis. This paper investigates FDI inflows in four highly distressed European economies (Greece, Italy, Portugal and Spain) for the period 1995-2013, using a dynamic panel data approach. The empirical results provide robust evidence that market size, exports, imports and labor cost are significant factors that affect FDI inflows in the South European countries under examination. Additional factors such as the European Commission's construction confidence index, financial depth, corporate taxation and the corruption perceptions index are also examined and display statistically significant results of the expected sign. The authors also confirm the negative impact of the Eurozone crisis on FDI inflows. The empirical results have important policy implications highlighting the factors that should be considered by policy makers in order to improve the countries' FDI attractiveness. The authors document the need for a strategic plan to attract FDI that should make the investing environment friendlier in order to foster economic growth. Policy makers should rebuild trust and confidence providing at the same time incentives to attract FDI, such as further reduction of bureaucracy and corruption, transparency, stability of the corporate tax policies, investor protection and easier access to funding. © Fotini Economou, Christis Hassapis, 2015.