Is there a euro effect in the drivers of US FDI? New evidence using Bayesian Model Averaging techniques

Abstract

In this paper we analyze the potential determinants of US outward FDI stock with aparticular focus on the euro effect during the period 1985-2017. To this aim, we considera large set of candidate variables suggested both theory and previous empirical anal-ysis. We select the covariates using Bayesian Model Averaging (BMA), a data-drivenmethodology. Our sample includes a total of 56 host countries, that represent aroundthe 70% of US outward FDI stock. We study the role of the euro on American FDI bothin Europe and the rest of the world. In Europe, we consider various country groups:the European Union (EU), the Euro Area (EA), as well as core and periphery within thislast group. We conclude that many variables studied by previous FDI literature cannotbe considered robust determinants. Moreover, US OFDI is explained by both horizon-tal and vertical motives. However, HFDI strategies predominate in EA core countries,whereas VFDI prevails in the periphery. As for the euro effect, the common currencyseems to have played an important role encouraging US FDI, being a crucial element inthe convergence of EA periphery to its core. In addition, our results indicate that theadoption of the euro has favoured VFDI to the detriment of HFDI.