Economic Integration and Productive Specialization in the EU27: does FDI influence Countries’ Specialization?

The objective of this article is two folded. Firstly, we proceed to an analysis of the evolution of productive specialization in the enlarged EU, taking into account all its actual 27 member countries. Given their decomposability properties, we use the entropy-based indices to measure countries' relative specialization and then, given our rather short period of analysis, we use the bootstrap method to analyze the evolution of the specialization index. We first analyze all economic sectors and then, our analysis is more detailed focusing on manufacturing industries. Globally, we find that specialization is decreasing across all economic sectors, while it is increasing across manufacturing industries. Secondly, we study specialization determinants, with a special interest for the impact of foreign direct investment (FDI). For homogeneity reasons, we analyze two separate samples, one including only developed countries of the European Union and the other, only developing member countries. In order to take into account endogeneity highly probable of most of our independent variables, we use the vector autoregression (VAR) technique and analyse the impulse response functions. Globally, FDIs seem to positively influence countries' relative specialization, for our both samples and for both economic sectors and manufacturing industries. However, their impact appears weaker than most of the other independent variables, such as market potential or relative endowments.