The factors affecting Foreign Direct Investments in Europe (2000-2019)

Abstract

This study is focused on the analysis of foreign direct investment (FDI), identifying which factors drive the investors to invest in European countries and how the countries are affected by these kinds of investments. In relation to the European countries, they differ in terms of their level of development. Therefore, we expect to see different results between countries as each country has different economic and social structure. European countries have been chosen as the sample in the specific study because in most studies the countries that are examined are either developing countries, African countries, etc. Some factors that are particularly considered are the tax regime of each country, the size of the country, inflation, imports as a percentage of Gross Domestic Product (GDP), and GDP per capita. The years 2000-2019 have been chosen in such a way that corresponds to the period in which the European debt crisis (2007-2008) occurred and could be observed how it affected Foreign Direct Investment in European Union countries. Particularly, in this thesis we will be dealing with the determination of the factors of Foreign Direct Investments through various articles and research, although there is an extensive bibliography on FDI. The inflation rate, interest rate, degree of opening, size of the market, tax system, and unemployment are some of the many factors that attract FDI in Europe and will be analyzed in this research. In this specific study, we will determine the dependent variable as FDI inflows as a percentage of GDP to obtain results if inflows are affected by the determinants. The dependent variable will be accompanied by six other independent variables: market size, inflation rate, interest rates, degree of openness, market taxes, and unemployment.Initially, through Stata, we created the graphs below in which we observe that GDP per capita increases over time in all countries. Due to the financial crisis, we observe increases and decreases from 2006-2008. We add variables such as regions and years to produce a more concise trend and to correct the model.In the specific study, a panel data will be used for the 28 European members of European Union including United Kingdom for the period 2000-2019.Panel data are multidimensional and include measurements over time and this is the reason we chosen this kind of data. An advantage of panel data is the heterogeneity.Moving on to the empirical study, we conducted several regressions with various independent variables and arrived at the following 3 models, which are displayed in the scoreboard. These models were conducted through OLS (1) and (2) and Random effects (GLS) (3). A Hausman Test was carried out to assess whether there are stable or random effects to achieve the best analysis and determination of regressions since the data are in panel form.The key findings indicate that each country's GDP per capita, degree of openness, total tax rate, and European regions are major determinants of attracting FDI. The degree of openness is positively related to FDI inflows as well as GDP per capita, which we have included in our model, showing that the variable has a nonlinear relationship. The study's main goal was to investigate the key aspects that attracted FDI to Europe between 2000 and 2019.