How Financial Crises Affect FDI and Related Macroeconomic Variables

Abstract

The new literature on the benefits and costs of financial globalization has increased in recent years because of the massive negative effects of the global financial crisis of 2008. While evidence based on microeconomic data shows some benefit of financial integration and the distortionary effects of capital controls, the macroeconomic evidence generally remains inconclusive. Also, some papers argue that financial globalization enhances macroeconomic stability especially in emerging economies, but others argue the opposite. The authors try to argue the effects of financial globalization and global financial crises on macroeconomic stability. This paper probes the effect of the financial crises since 2000 on specific Mediterranean economies including Greece and Turkey, comparatively. The main question to be answered in this paper is how selected macroeconomic variables affected the financial crises in these economies. Another question to be addressed is how macroeconomic variables have been affected by the last global financial crisis of 2008. Moreover, the research is focused on FDI (foreign direct investment) in these selected economies and examines the relationship between the macroeconomic variables and the financial crises. The relationship between relative macroeconomic variables, FDI and financial crises is determined using annual data from 2000 to 2010. The relationships between the indicators are analyzed using AMOS (Analysis of Moment Structures), a structural equation modeling (SEM) software where the model is presented in an intuitive path diagram to show hypothesized relationships among variables easier than just using standard multivariate statistics or multiple regression models alone.