Determinants of FDI in France: Role of Transport Infrastructure, Education, Financial Development and Energy Consumption

Shahbaz, Muhammad and Mateev, Miroslav and Abosedra, Salaheddin and Nasir, Muhammad Ali and Jiao, Zhilun (2019): Determinants of FDI in France: Role of Transport Infrastructure, Education, Financial Development and Energy Consumption.

Abstract

This paper explores the effect of education and transportation infrastructure on foreign direct investment for the French economy over the period of 1965-2017. Economic growth, financial development and electricity consumption are also considered as additional determinants of foreign direct investment. In so doing, the SOR unit root test is applied in order to examine unit root properties of variables in the presence of sharp and smooth structural breaks in the series. To examine the presence of cointegration between the variables, the bootstrapping ARDL cointegration test is applied. The empirical results show the presence of cointegration between the variables. Education and transportation add to foreign direct investment. Financial development declines foreign direct investment. The relationship between electricity consumption (economic growth) and foreign direct investment is bidirectional. The nonlinear relationship between education (transportation infrastructure) and foreign direct investment is U-shaped.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI, Transport Infrastructure, Education, Financial Development, Energy Consumption, Bootstrapping ARDL
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General

References

Abdouli, M. and Hammami, S. (2017). Exploring links between FDI inflows, energy consumption, and economic growth: Further evidence from MENA countries. Journal of Economic Development, 42(1), 95-117.

Abzari, M., Zarei, F. and Esfahani, S. S. (2011). Analyzing the link between financial development and foreign direct investment among D-8 group of countries. International Journal of Economics and Finance, 3(6), 148-156.

Ahmad, N., Ismail, N. and Nordin, N. (2015). The impact of infrastructure of foreign direct investment in Malaysia. International Journal of Management Excellence, 5(1), 584-590.

Agbloyor, E. K., Abor, J., Adjasi, C. K. D. and Yawson, A. (2013). Exploring the causality links between financial markets and foreign direct investment in Africa. Research in International Business and Finance, 28, 118-34.

Akpan, U. S., Isihak, S. R. and Asongu, S. A. (2014). Determinants of foreign direct investment in fast-growing economies: A study of BRICS and MINT. African Governance and Development Institute Working Paper WP/14/002

Al Nasser, O. M. and Gomez, X. G. (2009). Do well-functioning financial systems affect the FDI flows to Latin America. International Research Journal of Finance and Economics, 29, 60-75.

Alfaro, L., Kalemli Ozcan, S. and Volosovych, V. (2008). Why doesn't capital flow from rich to poor countries? An empirical investigation. The Review of Economics and Statistics, 90, 347-368.

Alfaro, L., Chanda, A., Kalemli-Ozcan, S. and Sayek, S. (2004). FDI and economic growth: The role of local financial markets. Journal of International Economics, 64(1), 89-112.

Ang, J. B. (2008). Determinants of foreign direct investment in Malaysia. Journal of Policy Modeling, 30, 185-189.

Anwar, S. and Nguyen, L. P. (2010). Foreign direct investment and economic growth in Vietnam. Asia Pacific Business Review, 16, 83-202.

Aschauer, A. D. (1989). Is public expenditure productive? Journal of Monetary Economics, 23, 177-200.

Asheghian, P. (2016). GDP growth determinants and foreign direct investment causality: the case of Iran. The Journal of International Trade & Economic Development, 25, 897-913.

Asiedu, E. (2006). Foreign direct investment in Africa: The role of natural resources, market size, government policy, institutions and political instability. World Economy, 29, 1, 63-77.

Assuncao, S., Forte, R. and Teixeira, A. (2011). Location Determinants of FDI: A Literature Review, FEP Working Papers No 433.

Barua, S., Junnatun, N. and Tun-Nessa, H. (2017). Economic climate, infrastructure and FDI: Global evidence with new dimensions. International Journal of Business and Economics, 16, 31-48.

Bayar, Y. and Gavriletea M. (2018). Foreign direct investment inflows and financial development in Central and Eastern European Union countries: A panel cointegration and causality. International Journal of Financial Studies, 6(55), 1-13.

Bayar, Y. and Ozel, H.A. (2014) Determinants of foreign direct investment inflows in the transition economies of European Union. International Journal of Research in Commerce, Economics & Management, 4(10), 49-53.

Bayar, Y. and Omer, F. O. (2016). Interaction between financial development and foreign direct investment inflows in Turkey. Paper presented at Scientific Cooperation for the Future in the Social Sciences, Usak, Turkey, September 22–23, 35-42.

Bekhet, H.A. and Othman, N.S. (2011). Causality analysis among electricity consumption, consumer expenditure, GDP and foreign direct investment (FDI): Case study of Malaysia. Journal of Economics and International Finance, 3(4), 228-235.

Bento, J.P. (2011). Energy savings via foreign direct investment? Empirical evidence from Portugal. Working Paper No. 2011/24, Maastricht School of Management, Maastricht.

Bierens, H. J. (1997). Nonparametric cointegration analysis. Journal of Econometrics, 77, 379-404.

Borensztein, E., De Gregorio, J. and Lee, J-W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115-135.

Brooks, D.H., Hasan, R., Lee, J.-W., Son, H.H. and Zhuang, J. (2010). Closing development gaps: challenges and policy options. ADB Economics Working Paper Series 209, Manila: Asian Development Bank.

Chang, R., Kaltani, L. and Loayza, N. V. (2009). Openness can be good for growth: The role of policy complementarities. Journal of Development Economics, 90, 33-49.

Cheng, L. K. and Kwan, Y. K. (2000). What are the determinants of the location of foreign direct investment? The Chinese experience. Journal of International Economics, 51, 379-400.

Choong, C.K. and Lam, S.Y. (2011). Foreign direct investment, financial development and economic growth: Panel data analysis. The IUP Journal of Applied Economics, 10(2), 57-73.

Choong, C. K. and Lim, K. P. (2009). Foreign direct investment, financial development, and economic growth: The case of Malaysia. Macroeconomics and Finance in Emerging Market Economies, 2, 13-30.

Choong, C-K. (2012). Does domestic financial development enhance the linkages between foreign direct investment and economic growth? Empirical Economics, 42(3), 819-834.

Claessens, S., Demirgüç-Kunt, A. and Harry, H. (2001). How does foreign entry affect the domestic banking system? Journal of Banking and Finance, 25, 891-911.

Cleeve, E.A., Debrah, Y. and Yiheyis, Z. (2015). Human capital and FDI inflow: An assessment of the African case. World Development, 74, 1-14.

Davies, R. B. (1987). Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika, 64, 247-254.

Desbordes, R. and Wei, Shang-Jin (2014). The Effects of financial development on foreign direct investment. Policy Research Working Paper No. 7065. World Bank Group, Washington, DC. Available at: https://openknowledge.worldbank.org/handle/10986/20515.

Desbordes, R. and Wei, S-J. (2017). The Effects of financial development on foreign direct investment. Journal of Development Economics, 127, 153-168.

Dickey, D. A. and Fuller, W. A. (1981). Likelihood ratio Statistics for autoregressive time series with a unit root. Econometrica, 49, 1057-1072.

Donaubauer, J., Neumayer, E. and Nunnenkamp, P. (2016). Promoting FDI through financial market development in host and source countries. International Growth Center Working Paper, available at: http://www.theigc.org/blog/promoting-fdi-through-financial-market-development-in-host-and-source-countries/

Dutta, N. and Roy, S. (2008). Foreign direct investment, financial development and political risks. MPRA Working Paper No. 10186, available at https://mpra.ub.uni-muenchen.de/10186/.

Enders, W., Lee, J. (2012). A unit root test using a Fourier series to approximate smooth breaks. Oxford Bulletin of Economics and Statistics, 74, 574-599.

Enisan, A. A. (2017). Determinants of foreign direct investment in Nigeria: A Markov regime-switching approach. Review of Innovation and Competitiveness, 3, 21-48.

Erenberg S. (1993). The real effects of public investment on private investment. Applied Economics, 23, 831-837.

Fauzel, S. (2016). Modeling the relationship between FDI and financial development in small island economies: A PVAR approach. Theoretical Economics Letters, 6, 367-375.

Gallant, A. (1981). On the bias in flexible functional forms and an essentially unbiased form: The Fourier flexible form. Journal of Econometrics, 15, 211-245.

Gallant, A. and Souza, G. (1991). On the asymptotic normality of Fourier flexible form estimates. Journal of Econometrics, 50, 329-353.

Goh, S. K., Yong, J. Y., Lau, C. C. and Tang, T. C. (2017). Bootstrap ARDL on energy-growth relationship for 22 OECD countries. Applied Economics Letters, 24, 1464-1467.

Goodspeed, T., Martinez-Vazquez, J. and Zhang L. (2007). Are government policies more important than taxation in attracting FDI. International Studies Program Andrew Young School of Policy Studies Georgia State University. Working Paper Series. ISP Working Paper, No. 07–02.

Hausmann, R. and Fernandez-Arias, E. (2001), Foreign direct investment: Good cholesterol? Foreign direct investment versus other flows to Latin America, OECD Development Center Seminars, OECD Paris.

Haughwout AF. (2001). Infrastructure and social welfare in metropolitan America. Economic Policy Review, 7, 43-54.

Hermes, N. and Lensink, R. (2003). Foreign direct investment, financial development and economic growth. The Journal of Development Studies, 40(1), 142-163.

Hong, J. (2008). WTO accession and foreign direct investment in China. Journal of Chinese Economic and Foreign Trade Studies, 2, 136-147.

Ibrahiem, D. M. (2015). Renewable electricity consumption, foreign direct investment and economic growth in Egypt: An ARDL approach. Procedia Economics and Finance, 30, 313-323.

Keller, W. (2010). International trade, foreign direct investment, and technology spillovers. Handbook of the Economics of Innovation, 2, 793-829.

Khadaroo, A. and Seetanah, B. (2010). Transport infrastructure and foreign direct investment. Journal of International Development, 22, 103-123.

Kheng, V., Sun, S. and Anwar, S. (2017). Foreign direct investment and human capital in developing countries: a panel data approach. Economic Change and Restructuring, 50, 341-365.

King, R.G. and Levine, R. (1993). Finance and growth Schumpeter might be right. The Quarterly Journal of Economics, 108, 717-737.

Korgaonkar, C. (2012). Analysis of the impact of financial development on foreign direct investment: A data mining approach. Journal of Economics and Sustainable Development, 3(6), 70-79.

Kumar, N. (2001). Infrastructure availability, foreign direct investment inflows and their export orientation: A cross-country exploration. Research and Information System for Developing Countries, New Delhi, November 2001.

Leybourne, S. J., Mills, T. C. and Newbold, P. (1998). Spurious rejections by Dickey-Fuller tests in the presence of a break under the null. Journal of Econometrics, 87, 191-203.

Limao, N. and Venables, A. J. (2001). Infrastructure, geographical disadvantage, transport costs and trade. World Development Economic Review, 15, 451-479.

Liu, Z. (2008). Foreign direct investment and technology spillovers: Theory and evidence. Journal of Development Economics, 85, 176-193.

Long, P. D., Ngoc, B. H., and Ha My, D. T. (2018). The relationship between foreign direct investment, electricity consumption and economic growth in Vietnam. International Journal of Energy Economics and Policy, 8(3), 267-274.

Loree, D. and Guisinger, S. (1995). Policy and non-policy determinants of US equity foreign direct investment. Journal of Business Studies, 26, 281-299.

McNown, R., Sam, C. Y. and Goh, S. K. (2018). Bootstrapping the autoregressive distributed lag test for cointegration. Applied Economics, 50, 1509-1521.

Mielnik O. and Goldemberg J. (2000). Converging to a common pattern of energy use in developing and industrialized countries. Energy Policy, 28, 503-508.

Miningou, E. and Tapsoba, S. (2017). Education systems and foreign direct investment: Does external efficiency matter? IMF Working Paper, WP/17/79.

Miyamoto, K. (2003). Human capital formation and foreign direct investment in developing countries. Working Paper No. 211, OECD Development Centre.

Mouhoud, E. M. (2013). Mondialisation et délocalisation des entreprises. Paris: La Découverte.

Najilee, M. and Al Nasser, O. M. (2015). Foreign direct investment, financial development and economic growth. The Journal of Developing Areas, 49(2), 227-245.

Narula, R. (1996). Multinational investment and economic structure: Globalization and competitiveness. Routledge, London and New York.

Nguyen, A.N. and Nguyen, T. (2007). Foreign direct investment in Vietnam: An overview and analysis of the determination of spatial distribution. Development and Polices Research Center (DPRC), Working Paper, Hanoi, Vietnam.

Nkoa, B.E.O. (2018). Determinants of foreign direct investment in Africa: An analysis of the impact of financial development. Economics Bulletin, 38(1), 221-233.

Omri, A. and Kahouli, B. (2014). Causal relationships between energy consumption, foreign direct investment and economic growth: Fresh evidence from dynamic simultaneous equations models. Energy Policy, 67, 913-922.

Pesaran, M. H. and Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In: Strom, S. (Ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge University Press.

Pesaran, M. H., Shin, Y. and Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326.

Plassard, J.-M. and Tran, T. T. N. (2009). L’analyse de là sur éducation ou du déclassement : l’escroquerie scolaire enfin démasquée ou beaucoup de bruits pour rien ? Celui qui augmente sa connaissance augmente sa douleur (Ecclésiaste 18). Revue d’économie politique, 119(5), 751-793.

Psacharopoulos, G. (1986). Welfare effects of government intervention in education. Contemporary Economic Policy, 4(3), 51-62.

Root, F. R. and Ahmed, A. A. (1978). The influence of policy instruments on manufacturing direct foreign investment in developing countries. Journal of International Business Studies, 9, 81-93.

Sadorsky, P. (2010). The impact of financial development on energy consumption in emerging economies. Energy Policy, 38, 2528-2535.

Sahin, S. and Ege, I. (2015). Financial development and FDI in Greece and neighbouring countries: A panel data analysis. Procedia Economics and Finance, 24, 583-588.

Salahuddin, M., Alam, K., Ozturk, I. and Sohag, K. (2018). The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait. Renewable and Sustainable Energy Reviews, 81(2), 2002-2010.

Sekkat, K. and Veganzones-Varoudakis, M. (2004). Trade and foreign exchange liberalisation, investment climate and FDI in the MENA countries. Working Papers DULBEA, Universite´ Libre de Bruxelles, Department of Applied Economics (DULBEA).

Shahbaz, M., Leitão, N. C. and Malik, S. (2011). Foreign direct investment-economic growth nexus: The role of domestic financial development in Portugal. Economics Bulletin, 31(4), 2824-2838.

Shahbaz, M., Omay, T. and Roubaud, D. (2018). The sharp and smooth breaks unit root testing of renewable energy consumption: the way forward. The Journal of Energy and Development, 44 (1).

Shatz, H. and Venables, A. J. (2000). The geography of international investment. World Bank Policy Research Working Paper 2338.

Soumare, I. and Tchana, F.T. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, 1-12, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1852168

Tang, C.F. (2009). Electricity consumption, income, foreign direct investment, and population in Malaysia: New evidence from multivariate framework analysis. Journal of Economic Studies, 36, 371-382.

Topel, H. R. (1997). Factor proportions and relative wages: The supply-side determinants of wage inequality. Journal of Economic Perspectives, 11(2), 55-74.

UNCTAD (2018). World Investment Report. Available at http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2130

Vincens, J. (2005). L’adéquation formation-emploi. Paris : La Découverte.

Wang, M. and Wong, S. (2011). FDI, education, and economic growth: Quality matters. Atlantic Economic Journal, 39, 103-115.

Wang, H. and Huifang Liu, H. (2017). An empirical research of FDI spillovers and financial development threshold effects in different regions of China. Sustainability, 9 (933), 1-21.

Wang, C., Hong, J., Kafouros, M. and Boateng, A. (2012). What drives outward FDI of Chinese firms? Testing the explanatory power of three theoretical frameworks. International Business Review, 21(3), 425-38.

Wheeler, D. and Mody, A. (1992). International investment location decisions: The case of US firms. Journal of International Economics, 33(1-2), 57-76.

Xu, B. (2000). Multinational enterprises, technology diffusion, and host country productivity growth. Journal of Development Economics, 62, 477-493.

Yao, Y., Chen, G., Smyth, R. and Zhang, L. (2018). Host-location financial development and foreign direct investment: City-level evidence from China. Working Paper (January 12, 2018). Available at SSRN: https://ssrn.com/abstract=3120148 or http://dx.doi.org/10.2139/ssrn.3120148.

Yol, M. and Teng T. (2009). Estimating the domestic determinants of foreign direct investment flows in Malaysia: Evidence from cointegration and error-correction model. Journal Pengurusan, 28, 3-22.

Zhang, K. H. (2001). Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America. Contemporary Economic Policy, 19, 175-185.