The Impact of EU Structural Funds on FDI

Odysseas Katsaitis and Dimitris Doulos

Kyklos, 2009, vol. 62, issue 4, 563-578

Abstract: The effectiveness of EU Structural Funds on the economic performance of the receiving countries has been extensively investigated in the last twenty years. The results indicate that the impact of these funds on economic growth is conditional on the quality of the institutions of the receiving countries. In the case of countries with poor institutional quality, the effect of Structural Funds on economic growth will be negative. The reason being, that Structural Funds do affect the allocation of recourses and in countries with poor institutional quality the misallocation of resources might worsen. For example, corruption might divert funds from productive activities; increased opportunities for rent seeking might absorb resources and so on. To the extent that EU Structural Funds have a negative impact on the allocation of resources and growth this might affect the attractiveness of the country as a location for FDI. In this research we investigate the impact of EU Structural Funds on the volume of FDI inflows in EU‐15 countries. The econometric analysis is based on a panel analysis of EU‐15 countries for the period 1970 – 2005. We utilize a variety of econometric techniques appropriate for this kind of panel data (fixed effects, random effects, OLS and GMM estimators). The results are extremely robust to these alternative specifications. The empirical findings are consistent with the findings of previous studies regarding the determinants of FDI and indicate that the impact of EU Structural Funds on FDI inflows critically depends on the institutional quality of the receiving countries. For countries with high quality institutions the EU Structural Funds have a positive impact on FDI, for countries with low quality institutions the impact will be negative.

Date: 2009
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