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Risk, Financial Stability and FDI

Kellard, Neil and Kontonikas, Alexandros and Lamla, Michael and Maiani, Stefano and Wood, Geoffrey (2020) 'Risk, Financial Stability and FDI.' Journal of International Money and Finance. ISSN 0261-5606

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Abstract

All Foreign Direct Investment (FDI) involves risk. Augmenting the international finance literature, we assess the effects of financial system risk on FDI trends through considering both origin and host country effects. Motivated by the sovereign debt crisis and based on a dataset including bilateral FDI holdings, this paper investigates the implications of sovereign and bank-related risk on FDI in the Eurozone. Strikingly, we find that in terms of banking risk, it is only that encountered in the country of origin that has an impact on FDI choices. However, we find that sovereign risk, in both origin and host countries, have effects. As a corollary, we suggest that although poor financial discipline by host governments has been widely blamed as the primary factor likely to frighten off overseas investors, it is amongst FDI supplying nations that the effects of sovereign yields seem most pronounced. Policymakers in countries seeking to attract FDI should not only be attentive to domestic conditions, but also be aware of the financing environment that multinational enterprises (MNEs) encounter in their home countries and how this might impact on their choices.

Item Type: Article
Uncontrolled Keywords: Foreign direct investment, Financial stability, Sovereign yields, Euro area, International regulation
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 17 Jun 2020 13:00
Last Modified: 06 Aug 2020 15:15
URI: http://repository.essex.ac.uk/id/eprint/27899

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