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Are energy market integrations a green light for FDI?

Maria Costa-Campi (), Jordi Paniagua () and Elisa Trujillo-Baute ()

No 2015/18, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: This paper studies the effect of energy market integration (EMI) on foreign direct investment (FDI). EMIs diminish energy uncertainty and price volatility in the host country and affect FDI through two channels: first, by harmonizing energy prices and, second, by reducing price dispersion. FDI may, as a result, increase both within and outside the EMI area, through energy stability mechanisms and price mechanisms, respectively. An empirical application on a global dataset including bilateral FDI data, during 2003-2012, using the gravity equation, shows that the integration of Portugal and Spain's electricity market in 2007 increased the amount of FDI's participants. Additionally, a positive increase in FDI from neighboring countries (in this instance, France), albeit lower in magnitude, is observed.

Keywords: Energy integration agreements; foreign direct investment; gravity equation; electricity prices; MIBEL (search for similar items in EconPapers)
JEL-codes: F20 F21 F23 Q40 Q43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-int
Date: 2015
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