Impact of electricity prices on foreign direct investment: Evidence from the European Union
Eva Bartekova & Thomas Ziesemer
#2015-021
In the course of recent years growing concerns over increasing energy
prices have emerged in the context of maintaining Europe’s international
competitiveness. In particular, rising electricity price differentials
adversely affect firms’ total production costs and ultimately impact
their investment decisions. Nonetheless, electricity prices as
locational determinants of foreign direct investment (FDI) have received
little attention in the literature so far. We address this gap by
including electricity prices in the traditional framework of FDI
analysis and examine the impact of price variation on net FDI inflows in
countries of the European Union (EU). We use a panel of 27 countries for
a period of 2003 - 2013 and system generalised method of moments (GMM)
as method of estimation. The main findings of the paper confirm that
besides tax rates, unit labour costs and competitive disadvantage in
secondary education, also electricity prices contribute to eroding
competitiveness of the countries. Yet, the effect of electricity prices
does not seem to be uniform across the EU. In fact, southwestern
countries tend to be more adversely affected than north-eastern, both in
the short and long run.
JEL Classification: F21, O52, Q43
Keywords: foreign direct investment, electricity prices, European Union,
generalised method of moments