Foreign direct investment and european monetary integration P. Pantelidis- University of Piraeus, Greece D. Kyrkilis- University of Macedonia, Greece E. Nikolopoulos- University of Macedonia, Greece

Prelaunch/ entrance period Eurozone with increased share of FDI inflows, especially in the prelaunch/entrance period % of Eurozone countries FDI inflows to total Developed countries FDI inflows Pre-euro phase Prelaunch/ entrance period Euro phase % However not all countries gaining the same both in prelaunch and after the euro launch period | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

% of FDI inflows to total Eurozone FDI inflows 3 Greece, Portugal, Spain and France losing FDI competitiveness among eurozone countries % of FDI inflows to total Eurozone FDI inflows -5,53p.p 1990-1998 Pre-euro phase 25,8% 1999-2001 Prelaunch/Entrance period 2002-2010 Euro phase 20,2% -1,47p.p 14,2% 12,7% 12,6% -1,06p.p 7,8% -0,38p.p 2,5% 1,2% 1,5% 0,3% 0,8% 1,3% Greece Portugal Spain France | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

Literature Review- FDI and EMU Aristotelous (2005) identified that EMU had a positive and statistically significant impact on US FDI inflows and that the increase of FDI into the EMU members was not accompanied by a decrease in FDI into the 3 countries (Denmark, Sweden and UK) which did not participate in EMU Petroulas (2006) indicates that the introduction of euro increased FDI by 14-16% within the euro area but also that the FDI is concentrated to large economies Aristotelous and Fountas (2009) suggest that EMU led to a statistically significant overall increase in in FDI to countries that adopted the euro. However the research study indicates that the flows differ substantially across member countries, with core countries having benefited mostly Souca and Lochard (2011) showed that the creation of EMU increased intra-EMU FDI stocks on average by around 30% , while also they indicated that there was no negative effect on non-EMU countries Aristotelous, K., (2005), Do currency unions affect foreign direct investment? Evidence from US FDI flows into the European Union, Economic Issues, 10, 1-10 Petroulas P.(2006), The effect of the euro on FDI, Working Paper, No 48, Oct. 2006, Bank of Greece Aristotelous K.and Fountas S.(2009), What is the impact of currency unions on FDI inflows? Evidence from Eurozone countries, Discussion Paper Series, Nov. 2009, Dep. Economics, University of Macedonia Souca J.and Lochard J.(2011), Does the single currency affect foreign direct investment?, The Scandinavian Journal of Economics, Vol.113, Issue 3, pp. 553-578, 2011 | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

Literature Review- FDI and EMU Timing of the euro effect on FDI Sousa and Lochard (2009) show that the euro’s impact on FDI has smoothly increased over time. In the figure are observed in the solid line three apparent peaks, even if differences are not statistically significant: (i) in 1994, the year that marked the beginning of the 2nd stage, (ii) in 1999, when the euro was introduced into world financial markets as an accounting currency and(iii) in 2002, the date of the launch of the euro in the form of physical coins and banknotes Issues for attention: Majority of research studies use data of only few years after EMU creation. As initial point of EMU in previous studies is used the year 1999 (creation of EMU) rather than 2002 (launch of euro) Souca J.and Lochard J.(2009) Does the single currency affect foreign direct investment?, Working paper , December 10, 2009 | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

Variables of the model Market size: Large host market facilitates the exploitation of economies of scale and gives scope for the production of more varieties of the same product. A positive relation between market size of the host country and inward FDI is expected. Technological capabilities: The ability of a country to transfer, adapt and create technological inputs constitutes a very important part of its location advantages. A positive relation between technological capabilities and inward FDI is expected. Labor cost : Relatively low labor cost either of the general workforce or of specific types of labor and skills is an important motive for FDI . A negative relation between labor cost and inward FDI is expected. Openness of the economy (imports and exports): FDI usually is more likely to be attracted in countries pursuing liberal policies and having more open economies. A positive relation between exports and inward FDI is expected. European Monetary Union : From the creation of EMU a mixed result is expected according to initial literature depending on the countries under examination | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

FDI= f ( Y, PA, W, X, M, EMU) Model + + - + Expected signs: + + - + FDI= Inward foreign direct investment Y= Real GDP which is a proxy for market size PA= Patent applications. This variable is a proxy for technological capabilities W= Unit labor cost, a proxy for wages X= Exports M= Imports EMU= Dummy variable for the launch of Euro. Takes the value of 1 since 2002 after the launch of physical euro notes | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

OLS estimates of FDI equation for period 1980-2010 Y(+) PA (+) W (-) euro Χ(+) Μ R2 F stat Greece +* -* _* + 0.92 31.09 Portugal - 0.81 17.12 Germany 0.65 4.01 Netherlands 0.64 3.52 Ireland 0.63 3.70 France 0.95 78.47 Finland 0.60 3.50 Spain 0.90 40.17 Belgium 0.94 82.95 * Means significant at 5% level | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

Conclusions The introduction of the Euro has asymmetric effects on the FDI inflows across individual Euro zone members Euro zone membership is statistically significant but negative determinant in the cases of Greece, Portugal, France, Belgium and Spain. For both Germany and Ireland their Euro area membership is a negative but statistically insignificant FDI inflow factor, while in the cases of both the Netherlands and Finland it is positive but also statistically insignificant. The mixed results verify the hypothesis made earlier that the monetary union is expected to have differentiated impact on FDI inflows across individual member countries The market integration degraded the motives for market seeking FDI. Individual markets are now easier to be served through the conventional trade networks, and import substituting FDI becomes a less attractive option for the expansion of firms in Europe. Although the motivation for market seeking FDI is now less significant, motives for both rationalized and strategic assets seeking FDI remain strong after the formation of the Euro zone. Both FDI types are based on the competitive advantages individual countries have to offer on production cost, and technological inputs. | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

Back-up slides | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

Greece- FDI inflows and % of FDI to EMU FDI 12.000 Greece increasing absolute FDI but not improving in terms of attractiveness of FDI vs. EMU countries Greece- FDI inflows and % of FDI to EMU FDI Pre-euro phase Prelaunch/ entrance period Euro phase % m 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FDI Inflows % of FDI to total eurozone countries FDI | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos

% of FDI inflows to total Eurozone FDI inflows 8 Germany and Belgium with increased FDI inflows both in prelaunch period and after the launch of euro % of FDI inflows to total Eurozone FDI inflows 11,3p.p 15,5p.p 26,7% 25,2% 20,2% 15,3% 4,8p.p 13,8% 4,0p.p 9,8% Germany Belgium 1990-1998 Pre-euro phase 1999-2001 Prelaunch/Entrance period 2002-2010 Euro phase After launch of euro, maintaining increased competitiveness vs. pre-euro phase | FDI and european monetary integration | P. Pantelidis- D. Kyrkilis- E.Nikolopoulos