EU Science Hub

Capital markets and cross-border investments

The aftermath of the 2008 crisis taught us that the size of capital flows matters, but also their composition. In the boom, capital flows were mainly concentrated on volatile instruments, such as portfolio flows and cross-border bank lending. When these flows reversed, credit to firms dried up and large-scale liquidity operations become necessary. Lack of credit had pernicious effects for firms’ survival and growth. The JRC contributes to these topics in several ways:

  • Non-bank financing of companies (especially SMEs): In relation to the Capital Markets Union initiative the JRC produces research on the determinants of medium and large firms’ funding choices.
  • JRC identifies barriers to the cross-border flows of financial investments developing and estimating measures of EU capital markets integration, the geographical diversification of cross-border investments and the extent of home bias in financial holdings.
  • The JRC develops analyses and research the field of risk sharing (consumption smoothing in case of economic shocks) with a focus on individual European countries.
  • The JRC, together with DG ECFIN develops and makes available consistent (yearly) bilateral data on the stocks and flows of foreign direct investments, portfolio and other cross-border investments. The FinFlows dataset will be soon available for free download.
  • Non-EU investments are a driver of economic growth, but at the same time, they raise concerns deriving from excessive concentration or strategic takeovers in specific sectors considered of national interest.  To investigate non-European investments in EU, the departure form aggregated data to increase the level of granularity by using firm-level data is needed. The JRC constructed the Foreign Ownership dataset (FOWN) with yearly data on EU companies controlled by non-European owners, M&As and greenfield investments (coverage 2007-present). FOWN offers breakdowns of foreign investments by origin country and typology of the investor (private company or state owned enterprise). It detailed the country and the industrial sector of the investment, as well as some financial variables of the acquired firm (e.g. assets and employment).