Does the Quality of Banking Assets Impact FDI Inflows? Evidence from 8 Western European Countries

This research paper focuses on the effects of banking assets quality on foreign direct investment (FDI) inflows in eight (8) western European nations using panel datasets spanning the period 2011 to 2018. Following theoretical backing on the variable selection which is in three-fold (Guyon and Andr´e Elisseeff, 2003): to improve the prediction performance of the predictors, provide faster and more cost-effective predictors, and lastly to provide a better understanding of the underlying process that generated the data, five components of assets were selected to measure bank’s asset quality. These are Total assets (TA), Loan loss reserves (LLR), net interest receivables (NIR), Loans and Profit/loss from bank real estate (RE). Findings from the panel data analysis showed a positive association between the quality of banking assets and the FDI inflows with other additional tests indicating the existence of long-run linkages between the variables. Also from the pairwise granger causality test, both bidirectional and unidirectional causal linkages were seen to exist between FDI inflows and the banking assets suggesting that pragmatic policies along these lines can help enhance these assets and as a result improve FDI inflows