Greenfield Foreign Direct Investment and Structural Reforms in Europe: what factors determine investments?

Summary:

This study investigates the determinants of bilateral greenfield FDI flows to EU countries for the period 2003-2014. We aim to provide new evidence on the importance of improving the investment environment, thereby contributing to the discussion of the third pillar of the Investment Plan for Europe.3 The FDI data used come from FDI markets, a service from the Financial Times. The dataset includes as country of destination the 28 EU countries and as country of origin EU and main non-EU countries. We build a gravity model explaining FDI with distance indicators and policy variables, while controlling for other important factors such as market size and the education level of the population. The policy variables include data on product market regulation from the OECD and on the business environment from the World Bank.

The study is organised as follows. Section 2 provides a general overview of the main FDI trends before and during the crisis, as well as the sectoral composition and identification of the main investors in greenfield FDI in Europe. In Section 3 we provide a brief summary of related literature, focussing on motivations to engage in foreign direct investment, the role of distance in the investment decision, and the inclusion of policy variables in the analysis. Section 4 describes in more detail a series of potential drivers of FDI, which will guide the implementation of our econometric strategy. In Section 5 we introduce the econometric model, present the basic results, and carry out a series of sensitivity checks. Section 6 contains results from some policy experiments, in order to get insight into the potential benefits of selected structural reforms for inward greenfield FDI. The paper is wound up in Section 7.

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