European FDI in Ireland and Iceland: Before and after the Financial Crisis

Helga Kristjánsdóttir,Stefanía Óskarsdóttir

doi:10.3390/jrfm14010023

Helga Kristjánsdóttir, Stefanía Óskarsdóttir

Open Access

https://doi.org/10.3390/jrfm14010023

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Abstract

This paper analyses Foreign Direct Investment (FDI) investment in Ireland and Iceland from other European countries during two periods, i.e., the pre-financial crisis period of 2000–2007 and the financial crisis period of 2008–2010. The aim of this research is to determine what made the countries interesting to foreign investors in both good and bad times; and, secondly, to examine whether European Union membership (and the Euro) made a difference in this respect. The results were obtained by using data from the OECD, the World bank, and other sources. The model constructed for the study applies the inverse hyperbolic sine transformation of the gravity model, which is a novel approach. The results demonstrate that before the financial crisis of 2008, European Union (EU) membership did not help Ireland attract more FDI from other EU countries. However, once it had been hit by the crisis, Ireland attracted more FDI from other EU countries. Iceland, on the other hand, which is not an EU country, attracted FDI from non-EU countries rather than from EU countries before the financial crisis. After the crisis, however, the origin within Europe, of FDI in Iceland had no significant effect on the flow of FDI into the country.

Highlights

This paper analyses Foreign Direct Investment (FDI) investment in Ireland and Iceland from other European countries during two periods, i.e., the pre-financial crisis period of 2000–2007 and the financial crisis period of 2008–2010
Use of the inverse hyperbolic sine transformation rather than the logarithm transformation allows for accountancy of zeros, which can be important in the study of small economies with limited databases (Kristjánsdóttir 2012)
Foreign direct investment (FDI) is an indicator of how interesting the country is in the eyes of potential investors, looking for long term investment opportunities, rather than portfolio investment

Summary

Introduction

This paper analyses Foreign Direct Investment (FDI) investment in Ireland and Iceland from other European countries during two periods, i.e., the pre-financial crisis period of 2000–2007 and the financial crisis period of 2008–2010. The aim of this research is to determine what made the countries interesting to investors in both good and bad times; and, secondly, to examine whether European Union (EU) membership (and the Euro) made a difference in this respect. Before deciding whether to invest long term in another country, investors take various economic and political factors into consideration. In this paper we look at some of these factors to see which mattered the most They include the risk of political instability, government efficiency, country endowments, country credit rating, investment risk, cultural distance and trade-bloc membership. The recent exit of Britain from the European Union (EU 2020), Euro skepticism in various parts of Europe, as well as the recent economic downturn in Europe due to Covid-19, indicate that there are lessons to be learnt from this research for other small and medium sized economies. Data on FDI from the OECD (2020) was used for the analysis

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