Economic sentiment indicators and foreign direct investment: Empirical evidence from European Union countries

Andrzej Cieślik,Mahdi Ghodsi

doi:10.1016/j.inteco.2021.07.001

Abstract

This paper studies the role of business sentiment in the decisions of multinational enterprises (MNEs) to undertake foreign direct investment (FDI) across European Union (EU) member states. Based on the knowledge-capital model, the study employs the Pseudo Poisson Maximum Likelihood (PPML) estimator and panel data to examine empirically the determinants of FDI across EU member states during the period 2003–2017. The empirical evidence suggests that better economic sentiment in an EU Member State induces MNEs to undertake FDI in that country, while worse economic sentiment in an EU member state motivates an MNE in that country to invest abroad.

Highlights

Multinational enterprises (MNEs) are important actors in the ongoing process of globalisation in the world economy
Statistics on Akaike information criteria (AIC) and Bayesian information criteria (BIC) in Table A1 for the model including economic sentiment indicators (ESIs) indicate a better fit of the foreign direct investment (FDI) model when it includes these main variables
The estimated coefficient of the economic sentiment indicator for the destination country is positive and statistically significant at the 5% level, while the estimated coefficient of the economic sentiment indicator for the country of origin is negative and significant at the 1% level. This means that our empirical results are in line with our predicted relationships concerning horizontal FDI, i.e. the higher value of the economic sentiment indicator for the destination country is associated with increased FDI inflows, while the higher value of the economic sentiment indicator for the country of origin is associated with decreased FDI inflows into the destination country

Summary

Introduction

Multinational enterprises (MNEs) are important actors in the ongoing process of globalisation in the world economy. An improvement in consumer sentiment usually reflects better future expectations by the consumer that would lead to higher final demand and consumption. Good business sentiment usually creates the mood of the business environment that induces investment in ongoing booming activity, which leads to higher economic growth in the future. Bad sentiment from a negative shock (e.g. political or election outcomes) in a market that has not yet matured in terms of its macroeconomic indicators would discourage investment and consumption in that market. Investors in such a market would move their investments to other markets that have booming expectations and better sentiment

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Results

Conclusion