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Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/134426
Is energy market integration a green light for FDI?
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This paper contributes to a better understanding of the effects of the European single market strategy by studying the effect of energy market integration (EMI) on foreign direct investment (FDI). Enforcing an EMI diminishes energy uncertainty and price volatility and signals stronger and credible institutions. FDI may, as a result, increase both within and outside the EMI area through two channels: first, via energy price converge and, second, via price dispersion reduction. We develop a formal model to explain how these mechanisms affect the capital invested abroad by heterogeneous firms. The Iberian Electricity Market (MIBEL) integration of 2007 is used to quantify the effect of EMI on FDI empirically. Gravity estimates on a global dataset including bilateral FDI data show that the integration of Portugal and Spain's electricity market increased both the amount of FDI's participants and the number of foreign projects. In line with our theoretical expectations, our estimates show that the increase of FDI is mainly due to the reduction in price dispersion. However, the institutional credibility signal sent by MIBEL had a greater influence than expected by the actual price reduction. Furthermore, we also observe a positive increase in FDI from neighboring countries (in this instance, France), albeit lower in magnitude.
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COSTA, M. Teresa (Maria Teresa), PANIAGUA, Jordi and TRUJILLO-BAUTE, Elisa. Is energy market integration a green light for FDI?. Energy Journal. 2018. Vol. 39, num. Special Issue 1, pags. 39-56. ISSN 0195-6574. [consulted: 19 of August of 2026]. Available at: https://hdl.handle.net/2445/134426