FDI Flows in EU Countries: The Role of Common Currency and Uncertainty - Essay Example

The liberalisation of the market, financial liberalisation, government policies and regional agreements and integration have contributed to the continued increase of FDI in Europe in particular and around the world in general (Coeurdacier, De Santis and Aviat 2009). Since the introduction, of Euro as the common currency among country members of the European Union, hopes for closer economic integration and political cooperation are heightened within the European Union (Henning 2007). Having a common currency within the Euro zone, is a fundamental issue among country members (De Souza and Lochard 2006) not only because the Euro plays a pivotal role in international transactions, especially with countries who have pegged their denomination with the Euro, but more so because a common currency has a positive effect on trade (Micco et al. 2003). However, when it comes to the impact of the Euro vis-a-vis FDI within the EU, minimal studies have been conducted (De Souza and Lochard 2006).

FDI contributes in the creation of economic stimulus that can propel economic growth and development. The European Commission (2009), in a study confirms that FDI has a direct and positive effect to investments, production and export as evidenced by continued increased in these sectors of the country. At the same time, technological spillover, competitiveness and management techniques are valuable indirect effects of FDI within the EU (European Commission 2009). In this regard, understanding the impact of the Euro in the FDI flows within the Euro zone is integral in apprehending the advantages and benefits in adopting a common Euro.

The 1957 Treaty of Rome marked the establishment of the European Economic Community. This behoves the ideal of integration and co-operation among member states, which led to development of the European Union in 1993. By 1999, the Euro was adopted as a common currency within the Euro zone and by 2002; it has replaced national currencies of the some of the member states. Upon the full adaptation of the Euro, the Euro zone became the second largest economy in the world in terms of GDP. Furthermore, through common currency, financial liberalisation and integration, trade liberalisation and workforce mobility serve as the pillars fortifying the decision in adopting the Euro.

As the EU continues to play a critical role in the global economy, inward FDI within the EU has become highly competitive (Gugler 2004; Oxelheim and Ghauri 2004). In this context, the research will delve into the impact of Euro, as the common currency, to FDI flows within the Euro zone. It ascertains that Euro has a positive impact in the Euro zone and that other extenuating factors such as corruption and credit rating may alter this effect. Moreover, the connection between geophysical distance and corruption is given a considerable notice since there is a possibility that proximity in the geophysical distance may have an influence in corruption perception. 1.2.

Research Question Considering the significance of the Euro zone in the global economy, of Euro as an international currency and of FDI as a form of international investment, this research will address the question “what is the impact of the Euro, as a common currency, to FDI flows within the Euro zone?” In order to further clarify this question, the following sub questions will also be addressed. (1) How does corruption affect FDI