Academic journal article The European Journal of Comparative Economics

Foreign Direct Investments in Europe: Are the East-West Differences Still So Noticeable?

Academic journal article The European Journal of Comparative Economics

Foreign Direct Investments in Europe: Are the East-West Differences Still So Noticeable?

Article excerpt

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1. Introduction

Ten years after the European Union's enlargement which has included ten new member states among Central and Eastern European countries (CEECs) - which was considered as a major step of European integration and as the promise of an economic catch-up for the new member states -it seems appropriate to question which factors motivate the direct investments realized by multinational firms in the enlarged Union. In particular, this article examines whether investment choices that prevail in the former EU-15 and the new and more heterogeneous EU-28 are driven by the same motivations or not. In other words, if the determinants of FDI in the Eastern part of Europe are similar to those realized in the former EU-15, it can be considered that a kind of convergence has been achieved between the two parts of the enlarged EU.

Foreign direct investment has often been considered as « convergence keys » (Boillot, 2002). Actually, the debates which occurred before the realization of the EMU as well as the EU enlargement emphasized the thesis of an « automatic » convergence across member countries. The model that prevailed at the beginning of the European integration process would continue in a context of a deeper economic integration in the EU. In the early steps of European integration, the countries participating in the EEC then in the EU benefitted from large economic and social outcomes, favored by the transformation of the size and contents of trade flows and the increase in FDI. The latter would be part of a virtuous circle: FDI tend to accelerate the production diversification and to increase trade in goods and services. The less developed countries would therefore catch up with the more advanced ones in their productive structures and their standards of living.

However, the enlargement process encompassed major uncertainties (Chavance et al., 2004). The enlargement could widen the wealth gaps and increase inequalities across EU member states, as a result of deeper productive globalization on the one hand, trade and financial liberalization on the other hand. While economic integration tends to promote direct investments, especially on an intra-European basis, it also contributed to deepen the existing gaps, fostered social and tax competition enhanced by individual strategies of competitive devaluation, which are no longer about monetary variables but rather about wage, employment and social protection systems. The convergence hypothesis would not hold in such a context and huge differences would be noticed between the former EU-15 countries on one hand and the new member states on the other hand.

The aim of this work is to analyze whether determinants of FDI in the two parts of the enlarged EU reflect such differences. Some studies based on the analysis of FDI showed huge differences in direct investment choices within the EU with a clear divide between the East and the West (Dupuch, 2004). Before the enlargement, CEECs were considered heterogeneous with large internal gaps. This article intends to reexamine this issue ten years later. Have the FDI choices of European countries changed towards a closer path than the one which prevailed in the former EU-15? From this point of view, can a kind of convergence be observed between the East and the West? Is there a form of FDI normalization in the EU or a persistence of specificities across the new member states?

The article is structured as follows: the next section will deal with FDI-related literature and its relevance within the enlarged European Union. This is then followed by the presentation of stylized facts on FDI in Europe since 1993 so as to enhance the econometric analysis of their determinants and to bring forward possible differences between Eastern and Western Europe.

2. Literature review

There are many motivations prompting a firm to expand internationally. They can be classified into four categories according to Berhman's classification (1972) which was resumed by Dunning (1993, 2008) on the mainspring of multinationals: Market seeking, Resource seeking, Efficiency and Strategic Asset seeking. …

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