Determinants of Foreign Direct Investment: insights from selected EU countries

Abstract

Foreign Direct Investment (FDI) is a key driver of economic growth, innovation, and sustainable development. Understanding its macroeconomic determinants is essential for policymakers aiming to foster favourable investment environments. However, existing literature lacks consensus on which macroeconomic factors significantly influence FDI. This study addresses this gap by exploring the determinants of FDI across selected EU countries. The study aims to analyze the impact of key macroeconomic variables, such as GDP growth, unemployment rate, public debt, trade openness, corporate income tax rate, and inflation, on FDI, and to identify the most significant drivers of investment flows in the EU context. Panel regression analysis was conducted using data from 17 EU countries from 2014–2023. Data were sourced from Eurostat, OECD, the World Bank, and the International Monetary Fund. The random effects model was selected based on the Hausman test, ensuring robust results. GDP growth and unemployment rate positively influenced FDI, while public debt, trade openness, and corporate income tax rates negatively impacted it. Inflation was not statistically significant. These findings underscore the importance of economic growth and fiscal prudence in attracting investments. This study contributes to the literature by identifying critical macroeconomic factors affecting FDI in the EU, providing actionable insights for policymakers to optimize investment climates. The research also offers a foundation for further empirical investigations into FDI determinants.