THE PUBLIC FINANCES, BANK CREDIT, AND FOREIGN DIRECT INVESTMENT: EVIDENCE FROM EUROPEAN UNION COUNTRIES
Abstract
This study explores the macroeconomic and financial determinants of
Foreign Direct Investment (FDI) inflows in the 27 European Union member
states over the period 2005–2023. Using a dynamic panel specification, we
assess the influence of domestic demand, fiscal stance, political stability,
and credit conditions on FDI dynamics. The results indicate that lagged FDI,
GDP growth, household consumption, and political stability significantly
enhance FDI inflows, while inflation is not a significant driver. Public
debt and fiscal deficits are associated with reduced FDI, pointing to the
importance of macro-financial stability. Of particular interest is the role
of bank credit, which shows a positive and marginally statistically
significant effect on FDI. This finding suggests that improved access to
domestic credit may lower entry costs, increase investor confidence, and
facilitate integration into local value chains. The analysis underscores the
complementary relationship between financial intermediation and foreign
investment, providing empirical support for policies aimed at strengthening
banking sector depth as part of FDI attraction strategies.
JEL Classification
G21, H62, H63, C23, F21
Keywords
fforeign investment inflows, credit to private sector, fiscal policy, panel data econometrics, GMM estimation
How to cite
Ioan Chirilă (2025). THE PUBLIC FINANCES, BANK CREDIT, AND FOREIGN DIRECT INVESTMENT: EVIDENCE FROM EUROPEAN UNION COUNTRIES. Financial Studies, 29(4), 84-97. DOI: 10.65672/fs.2025.4.5.
RePEc record
Handle: Repec:vls:finstu:v:29:y:2025:i:4:p:84-97