The Currency Union Effect on Foreign Direct Investment: A Case Study

Abstract

The paper presents a case study regarding the currency union effect on foreign direct investment (FDI). The issue is addressed in terms of Spain’s experience with the Economic and Monetary Union (EMU). The model specification disentangles the FDI effect caused by entry to the European Union (EU) from the FDI effect triggered by EMU membership. The study finds that Spain has been benefited substantially as a FDI destination initially by entry to the EU and subsequently by membership to the EMU. The analysis shows that EU effect is more prominent than the EMU effect; the EU effect accounts for 134.96% increase in FDI, whereas, the EMU effect accounts for 67.51% increase in FDI.