Public Finances, Bank Credit, and Foreign Direct Investment: Evidence from European Union Countries

This study explores the macroeconomic and financial determinants of Foreign Direct Investment (FDI) inflows in the 27 European Union member states over the period 2005–2023. Using a dynamic panel specification, we assess the influence of domestic demand, fiscal stance, political stability, and credit conditions on FDI dynamics. The results indicate that lagged FDI, GDP growth, household consumption, and political stability significantly enhance FDI inflows, while inflation is not a significant driver. Public debt and fiscal deficits are associated with reduced FDI, pointing to the importance of macro-financial stability. Of particular interest is the role of bank credit, which shows a positive and marginally statistically significant effect on FDI. This finding suggests that improved access to domestic credit may lower entry costs, increase investor confidence, and facilitate integration into local value chains. The analysis underscores the complementary relationship between financial intermediation and foreign investment, providing empirical support for policies aimed at strengthening banking sector depth as part of FDI attraction strategies.