Abstract
The paper identifies factors affecting the foreign direct investment (FDI) inflow. It analyzes the determinants of FDI in recent empirical evidence as well as determines differences among FDI factors in Greece, Ireland, and the Netherlands. The determinants being examined are the gross domestic product (GDP) per capita, exchange rate, unit labor costs, trade openness as well as inflation. The analyzed period is 1974–2012. Data were collected from the World Bank and the Organization for Economic Cooperation and Development (OECD) databases. With the help of the VAR model it was determined that only the exchange rate had a significant impact on FDI in Greece. Exchange rate, trade openness and inflation had a slight impact on FDI in Ireland. GDP per capita, unit labor costs and inflation had a slight impact on FDI in the Netherlands. The introduction of euro and the financial crisis had a significant impact on FDI only in Greece. Furthermore, after comparison of public debt, the ease of doing business ranking, budget deficit and the corruption index among the countries, it was determined that the low level of FDI in Greece was caused by the unfavorable investment climate.
Highlights
The economic development requires huge financial resources
A large part of movements in the foreign direct investment (FDI) sequence were explained by gross domestic product (GDP), which was not observed in FDI sequence movements in other models
The Netherlands did not have the largest GDP per capita only in 2001–2008 when it was surpassed by Ireland
Summary
The economic development requires huge financial resources. If local savings are low, the main government’s objective is to attract capital from abroad. Foreign capital can finance investment, induce economic growth as well as increase the standard of living. With FDI, a host country does not have to diminish consumption in order to reduce the current account deficit. Capital investments abroad can help investors to diversify their portfolios by investing in various countries. They reduce the overall risk of their portfolio by diversifying it. FDI investors acquire market access as well as lower cost inputs
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