The Impact of EU Enlargement on FDI Flows
International Finance Review, Vol. 6, pp. 473-499, 2006
Posted: 31 Jan 2006 Last revised: 23 Jan 2009
The enlargement of the European Union in 2004 to new members from beyond the former Iron Curtain could increase the attractiveness of the whole European continent for firms concerned about competitiveness. The competitive advantage of new members is derived mostly from labor productivity, and not so from lower taxes or large (potential) transfers from the European Union budget. Compared to opportunities, the foreign direct investment inflows and outflows of the new members have been so far small and slow growing. On the inward side, part of this performance is due to the wrapping up of privatization and the slow take-off of large greenfield projects. Part of the explanation however is in the protectionist pressures in the old members of the Union, prompted by fears of massive relocation to new members. On the outward side, the low level of foreign direct investment reflects the nascent stage of capitalism in new member states. In the near future, both inward and outward foreign direct investment is expected to rise in the new member countries.
Keywords: European Union, foreign direct investment, enlargement, labor productivity, tax competition, investment creation/diversion
JEL Classification: F21, F23, F02, O52, F15, J31, H73
Suggested Citation: Suggested Citation