DO NOT QUOTE WITHOUT PRIOR PERMISSION BY THE AUTHORS On the Determinants of Euro Area FDI to the United States: The OLI-Tobins Q Framework

This paper aims to explain the long-run determinants of euro area FDI to the United States during the period 1980-2001. The theoretical model developed in this paper incorporates the traditional FDI model based on the OLI-framework into the Tobin’s Q-model of investment. The model is estimated using the fixed effects panel estimator, with the euro area proxied by a panel involving most of the euro area countries. In accordance to the theoretical model, the investment climate in the euro area, as reflected in Tobin’s Q – including a measure adjusted for economic developments common to both the United States and the euro area is found to influence euro area FDI to the United States. Moreover, the inclusion of the Tobin’s Q seems to enhance the traditional OLI framework specification by adding further explanatory power to the FDI equation. Overall, the empirical findings suggest that euro area patents (ownership advantage), various variables related to productivity in the United States (location advantage), the volume of bilateral telephone traffic to the United States relative to euro area GDP (location advantage), Tobin’s Q and the real exchange rate (capital gains) are statistically significant determinants of euro area FDI to the United States. European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany. E-mail: [email protected]; [email protected]. School of Economics, University of Nottingham, University Park, NG7 2RD Nottingham, United Kingdom. E-mail: [email protected] We would like to thank participants to an ECB internal seminar, where an earlier version of this paper was presented, for their very useful comments and Lorenzo Cappiello and Stelios Makrakakis for valuable suggestions. However, the views expressed in this paper are those of the authors and do not necessarily represent those of the ECB or the Eurosystem.