Authors: Fotini Economou, Christis Hassapis

Title: Foreign Direct Investment Inflows: Evidence from four highly distressed European economies

Abstract

Foreign direct investment (FDI) has been widely considered to be a significant growth driver for the host economies. Especially during periods of economic crisis characterized by dramatic unemployment levels, FDI in productive sectors can have a crucial impact on the economic recovery. This paper investigates FDI inflows in four highly distressed European economies, namely Greece, Italy, Portugal and Spain for the period 1980-2012, using a dynamic panel data approach. A Panel-VAR analysis is employed in order to examine the orthogonalised impulse response functions as well as the variance decomposition of the basic variables. The empirical results indicate that lagged FDI inflows, market size and labor cost are significant factors that affect FDI inflows in the South European countries under examination. Finally, additional factors such as the financial depth, the European Commission’s confidence indices, the corruption perceptions index and the corporate taxes are also examined.