Defence-Sector Intensity and Foreign Direct Investment in the European Union Under Global Uncertainty: A Multi-Method Assessment

Abstract

Abstract

This study examines the association between defence-sector intensity and foreign direct investment (FDI) in 23 European Union countries from 2005 to 2023. Six defence indicators and three global uncertainty measures were analysed using fixed-effects panel regressions, regularised regression, gradient boosting, country-profile comparisons, and panel temporal-predictability tests. In the principal country-and-year fixed-effects models, military expenditure as a percentage of GDP and as a percentage of government expenditure had positive contemporaneous coefficients. Both coefficients remained statistically supported by Driscoll–Kraay and wild-cluster-bootstrap inference after adjustment for the two primary hypotheses, although their Holm-adjusted country-clustered p-values were 0.053. The findings were sensitive to country coverage: excluding Hungary, Ireland, and the Netherlands reduced the standardised estimates, and neither coefficient remained statistically significant under wild-cluster-bootstrap inference. Neither primary indicator was supported in the available-case EU27 extension; matched-period comparisons indicated that this divergence reflected country composition together with the shorter common observation window. Defence indicators did not provide stable incremental predictive information for countries excluded from model fitting, and no temporal-predictability result remained significant after dependence-aware block-bootstrap inference and false-discovery-rate adjustment. Neither global geopolitical risk nor the country profiles provided evidence of coefficient differences. Overall, the evidence is indicator-, sample-, and method-dependent and does not establish a causal or generally applicable effect of defence expenditure on FDI. From a sustainable-development perspective, security expenditure should therefore be assessed alongside fiscal capacity, investment conditions, and country-specific economic structures rather than being assumed either to attract or to displace foreign investment uniformly.