Economic Integration and FDI: An Empirical Analysis of Foreign Investment in the EU and in Central and Eastern Europe

• Published in: Empirica Vol. 26; no. 2; pp. 95 - 121
• Main Authors: Brenton, Paul Anthony, Lücke, Matthias, Mauro, Francesca Di
• Format: Journal Article
• Language: English
• Published: New York Springer 1999; Springer Nature B.V
• Series: Empirica
• Subjects: Costs; Economic integration; Economic theory; Estimates; Exports; Foreign direct investment; Foreign investment; Foreign subsidiaries; gravity model; International investment; International trade; Investment theory; Liberalization; Studies; Transition economies
• ISSN: 0340-8744; 1573-6911
• DOI: 10.1023/a:1007006429600

Recent evidence suggests that regional economic integration provides an important stimulus not only to trade, but also to FDI. In contrast, the available theory on FDI does not yet provide empirically testable propositions on the effects of concurrent trade and investment liberalisation. Moreover, given the limits of simulation models, which rely heavily upon parameter choice, in assessing the impact of such liberalisation, there is a need for empirical analysis to identify the principal features of FDI. This paper uses a 'gravity model' approach to assess the impact of the deepening integration between the EU and the CEECs on FDI flows in terms of three key issues. First, we provide systematic estimates of the expected long-term level of FDI in the CEECs. Second, we investigate whether FDI in the CEECs, on the one hand, and source country exports and imports, on the other hand, are complements or substitutes. Finally, we enquire whether an increase in the attractiveness of the CEECs to foreign investors has affected the magnitude of FDI going to other European countries. [PUBLICATION ABSTRACT]