European economic integration and FDI location : the fifth enlargement

Abstract

The fifth enlargement of the European Union (EU) involved the accession of ten Central and East European Countries (CEECs). A crucial element of the enlargement was the economic liberalization of the CEECs, for which Foreign Direct Investment (FDI) played an important role. While it is known that FDI increased in the CEECs after accession, relatively little is known about the nature of this investment and about its location determinants. The aim of this thesis is to investigate the location of FDI projects across the main 25 countries and 260 NUTS2 regions of the European Union. The study uses annual panel data from the European Investment Monitor for 1997 to 2010. This gives project-level information on over 35,000 cross-border investments, covering ‘greenfield’ projects that add to capacity, arising from new investment or expansions. The thesis has three main contributions. First, the spatial distribution of FDI activity is examined at the country and region level. It reveals the nature and changing pattern of FDI location both before and after the fifth enlargement. Second, the motives for FDI location are investigated at the country-level. Using a conditional logit model it shows that FDI in the ‘old’ EU is predominantly ‘specific-asset’ resource-seeking for higher skills, whereas in the ‘new’ EU it is market-seeking and ‘general-asset’ resourceseeking for inexpensive unskilled and semi-skilled labour. Further, expansions are not simply about efficiency-seeking, i.e. adding scale for the purpose of achieving greater economies. Third, the role of border effects is examined to see if FDI agglomerates in the CEECs close to the former West-East border. It recognises that the regions alongside theWest-East border tend to be ‘winners’ of EU enlargement, receiving about 82% more FDI projects more than non-border regions. This suggests that national borders continue to shape the spatial distribution of economic activity.