The Effect of Certain Factors on FDI Attraction - A cross-country analysis
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In this Master Dissertation we examine the effects of (i) the direct taxes to GDP ratio, of (ii) the nominal unit labor cost, and of (iii) the business cycle fluctuations on the FDI net inflows, for the 19 Euro Area member states between 1999 and 2014. We estimated with Fixed and Random Effects three equations: one for the level of FDI net inflows, one for the first differences at current time and with one period , and one only with lagged differences – model (III). Business cycle was proxied with unemployment rate, and we additionally included a dummy for MOU regimes and one for the post and pre crisis periods. We have found that direct taxation triggers changes in FDI net inflow in the following year, but not for both fixed and random effects. Direct taxes are not associated with FDI net inflow at present time. We found no empirical evidence at all that unit labor cost affects FDI net inflows. Finally, for the business cycle, we found that it is negatively correlated with FDI net inflow at present time, indicating that recessions are associated with lower FDI inflows, but with one period lag, increases in unemployment positively affect FDI net inflows of the following period. We attempted a possible explanation for the counter intuitive results that may serve as a suggestion for future research.