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Eastern European Economic Integration and Foreign Direct Investment

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  • George Norman
  • Massimo Motta

Abstract

Economic transition in Eastern Europe should generate market growth. In addition, current discussions on economic integration and the development of a free‐trade area in Eastern Europe will improve market accessibility. These two forces will significantly affect the strategies by which external firms will choose to supply markets in Eastern Europe. This paper examines the ways in which supply strategy is likely to change. We show that both market growth and improved market accessibility will lead the external firms to switch from exporting to foreign direct investment. However, market growth is likely to lead to dispersed investment in the growing economies, whereas increased market accessibility, by establishing an integrated regional bloc in Eastern Europe, is more likely to lead to concentrated investment plus infra‐regional exports to the remainder of the regional bloc. The switch from exporting to local production through foreign direct investment will favor consumers through lowered prices but will harm national producers by depressing profit margins.

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  • George Norman & Massimo Motta, 1993. "Eastern European Economic Integration and Foreign Direct Investment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 483-507, December.
    • Handle: RePEc:bla:jemstr:v:2:y:1993:i:4:p:483-507
    DOI: 10.1111/j.1430-9134.1993.00483.x
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    1. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-121, February.
    2. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-783, November.
    3. Hughes, Gordon & Hare, Paul G, 1992. "Industrial Policy and Restructuring in Eastern Europe," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 8(1), pages 82-104, Spring.
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    Cited by:

    1. Sandwip Kumar Das & Manoj Pant, 2006. "Incentives for Attracting FDI in South Asia," International Studies, , vol. 43(1), pages 1-32, January.
    2. Uppal, Yogesh, 2008. "Preferential trading areas: investment and welfare effects when countries differ in their size," MPRA Paper 15193, University Library of Munich, Germany.
    3. J. Peter Neary, 2002. "Foreign Direct Investment and the Single Market," Manchester School, University of Manchester, vol. 70(3), pages 291-314, June.
    4. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
    5. Mukherjee, Arijit & Suetrong, Kullapat, 2012. "Trade cost reduction and foreign direct investment," Economic Modelling, Elsevier, vol. 29(5), pages 1938-1945.
    6. Priya Ranjan, 2006. "Preferential trade areas, multinational enterprises, and welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(2), pages 493-515, May.
    7. Haufler, Andreas & Wooton, Ian, 1997. "Tax competition for foreign direct investment," Discussion Papers, Series II 329, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    8. Collie, David R., 2011. "Multilateral trade liberalisation, foreign direct investment and the volume of world trade," Economics Letters, Elsevier, vol. 113(1), pages 47-49, October.
    9. Arijit Mukherjee, 2008. "Unionised Labour Market and Strategic Production Decision of a Multinational," Economic Journal, Royal Economic Society, vol. 118(532), pages 1621-1639, October.
    10. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," European Economic Review, Elsevier, vol. 50(2), pages 285-305, February.
    11. Carlo Altomonte, 2007. "Regional Economic Integration and the Location of Multinational Firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(2), pages 277-305, July.
    12. Carlo Altomonte, 2004. "Regional economic integration and the location of multinational enterprises," KITeS Working Papers 152, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jan 2004.
    13. Collie, D. & Vandenbussche, H., 1999. "Trade, FDI, and unions," Other publications TiSEM 13ee73a4-db0a-4438-a724-a, Tilburg University, School of Economics and Management.
    14. Jan Haaland & Ian Wooton, 1998. "Antidumping jumping: Reciprocal antidumping and industrial location," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(2), pages 340-362, June.
    15. Collie, David R., 2009. "Tacit Collusion over Foreign Direct Investment under Oligopoly," Cardiff Economics Working Papers E2009/8, Cardiff University, Cardiff Business School, Economics Section.
    16. Collie, David R. & Norman, George, 2013. "Partial Collusion and Foreign Direct Investment," Cardiff Economics Working Papers E2013/9, Cardiff University, Cardiff Business School, Economics Section.
    17. Carlo Altomonte, 1998. "FDI in the CEEC's and the Theory of Real Options: An Empirical Assessment," LICOS Discussion Papers 7698, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    18. Marta Castilho & Soledad Zignago, 2000. "Commerce et IDE dans un cadre de régionalisation. Le cas du Mercosur," Revue Économique, Programme National Persée, vol. 51(3), pages 761-774.
    19. Facundo Albornoz, Gregory Corcos and Toby Kendall, 2005. "Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield," Discussion Papers 05-15, Department of Economics, University of Birmingham.

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