The effect of macroeconomic instability on FDI flows: A gravity estimation of the impact of regional integration in the case of Euro-Mediterranean agreements

Dalila Chenaf-Nicet and Eric Rougier
Authors registered in the RePEc Author Service: Dalila Nicet - Chenaf ()

Cahiers du GREThA (2007-2019) from Groupe de Recherche en Economie Théorique et Appliquée (GREThA)

Abstract: In order to diversify their risks, firms facing uncertainty in their domestic market may choose to increase their investment abroad by transferring production to more stable host economies. By estimating a gravity model of foreign direct investment (FDI) flows from Europe and the Mediterranean region to the four main recipients of FDI in the Middle East and North Africa (MENA) region from 1985 to 2009, this article tests (1) the extent to which FDI inflows are affected by macroeconomic volatility in the source country and (2) whether regional trade and investment agreements could have increased this FDI sensitivity to source country’s macroeconomic volatility. We find that the incidence of FDI between two countries increases with source GDP instability and with host GDP stability. Moreover, FDI to MENA countries tends to be countercyclical with respect to the source country’s business cycle. We also find that although FDI reactivity to host country’s uncertainty is not conditioned by North-South trade and investment agreements, it becomes negative for South-South regional integration. Last, we show that although the source country’s instability certainly matters when explaining bilateral FDI flows in our sample, its impact may be less important when investments are driven by cost differentials, that is, for vertical investment.

Keywords: Output volatility; FDI; gravity model; source country instability; European Union; Middle East and North Africa; regional trade integration; bilateral investment treaties; horizontal FDI; vertical FDI (search for similar items in EconPapers)
JEL-codes: F21 F4 F43 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ara, nep-int and nep-mac
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Related works:
Journal Article: The Effect of Macroeconomic Instability on FDI Flows: A Gravity Estimation of the Impact of Regional Integration in the Case of Euro-Mediterranean Agreements (2016)
Journal Article: The effect of macroeconomic instability on FDI flows: A gravity estimation of the impact of regional integration in the case of Euro-Mediterranean agreements (2016)
Working Paper: The effect of macroeconomic instability on FDI flows: A gravity estimation of the impact of regional integration in the case of Euro-Mediterranean agreements (2016)
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