The common Currency Effect on FDI

This paper studies the effect of the Euro on international FDI flows. Research is based on data from 30 OECD reporting countries and 4 most important partner countries based on combined FDI flows over the period 2002-2011. FDI flows are estimated by implementing the widely used gravity equation approach. In general, we find that there is no significant Euro effect on the FDI outward flows. Moreover, we also do not find significant effect of the EU membership and exchange rate standard deviation on the FDI flows. In the presence of country-pair fixed effects, we find that only GDP is of significance in the model. We conclude that most of the variations in the dependent variable are explained by unobservable country-pair fixed effects.