Friday, 18 March 2011: 17:20
It is well supported in the relevant literature that certain variables that act as determinants of the volume of short-term capital flows and portfolio financing, can also affect the composition and the direction of real capital flows (Froot and Stein, 1991, Goldberg and Klein, 1997, Barrel and Pain, 1998, Sazanami et. al. 2003). Since foreign direct investors can not diversify in financial markets, they can not easily hedge against financial risk, which in term is linked with general financial conditions and with financial crises. Thus, along with the traditional macroeconomic determinants of FDI, additional nominal explanatory variables such as the exchange rates should be encountered in undertaking physical investment decisions, as such variables affect several comparative costs and the cost of lending. In this study, we examine panel data evidence of Greek outward FDI flows directed to 16 EU and non-EU countries from 1997-2008, focusing on the relative importance of nominal variables on the determination of the direction of FDI. The results clearly show that – under different specifications – increases in the level of exchange, affect FDI flows directed from the home to the host economies. Additional sensitivity analysis demonstrates that other nominal macroeconomic variables, such as the exchange rate volatility, the minimum nominal wage in the host economy and the price of physical capital in the home economy are strongly significant for the streaming of Greek FDI in the absorbing economies.