Differences in Inward FDI Performance Between the Southern Eurozone and Eastern EU Members: A Panel-Data Analysis Over 2004-2016

Abstract

Abstract The aim of this paper is to examine the factors that explain the observed differences in inward foreign direct investment (FDI) performance between the peripheral southern eurozone countries (namely Greece and Portugal) and the eight Eastern EU members (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia) that joined in 2004. The empirical analysis, which is based on the estimation of a panel-econometric model during the 2004-2016 period, provides for Greece and Portugal policy relevant insights with respect to improving the international competitiveness and attracting more FDI inflows vis-a-vis Eastern EU countries, which have outperformed the two southern eurozone members. The results indicate that, among other factors, positive differences in labour costs and corporate tax rates between southern eurozone members and Eastern EU member states largely explain the observed differences in inward FDI performance among those two country groups. The higher labour costs and corporate taxation in Greece and Portugal exhibit a strong negative impact on their relative inward FDI performance vis-avis Eastern EU members. Furthermore, differences in economic openness and integration into vertical production networks also have a significant effect on inward FDI performance.