IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp13668.html
   My bibliography  Save this paper

The Effect on Foreign Direct Investment of Membership in the European Union

Author

Listed:
  • Bruno, Randolph Luca

    (University College London)

  • Campos, Nauro F.

    (University College London)

  • Estrin, Saul

    (London School of Economics)

Abstract

This paper explores the impact of EU membership on foreign direct investment (FDI). It analyses empirically how the effects of such deep integration differ from other forms and investigates what drives these effects. Using a structural gravity framework on annual bilateral FDI data for almost every country in the world, over 1985-2018, we find EU membership leads FDI into the host economy to be about 60% higher for investment from outside the EU, and around 50% higher for intra-EU FDI. Moreover, we find that the effect of EU membership on FDI is larger than from membership of NAFTA, EFTA, or MERCOSUR, and that the Single Market is the cornerstone of this differential impact.

Suggested Citation

  • Bruno, Randolph Luca & Campos, Nauro F. & Estrin, Saul, 2020. "The Effect on Foreign Direct Investment of Membership in the European Union," IZA Discussion Papers 13668, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp13668
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp13668.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Daria Taglioni & Richard Baldwin, 2014. "Gravity chains: Estimating bilateral trade flows when parts and components trade is important," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 61-82, November.
    2. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    3. Camilla Mastromarco & Léopold Simar, 2015. "Effect of FDI and Time on Catching Up: New Insights from a Conditional Nonparametric Frontier Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(5), pages 826-847, August.
    4. J. Peter Neary, 2002. "Foreign Direct Investment and the Single Market," Manchester School, University of Manchester, vol. 70(3), pages 291-314, June.
    5. Bas Straathof & Gert Jan Linders & Arjan Lejour & Jan Möhlmann, 2008. "The internal market and the Dutch economy: implications for trade and economic growth," CPB Document 168.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Blomström, Magnus & Kokko, Ari, 2003. "The Economics of Foreign Direct Investment Incentives," EIJS Working Paper Series 168, Stockholm School of Economics, The European Institute of Japanese Studies.
    7. El-Agraa,Ali M., 2011. "The European Union," Cambridge Books, Cambridge University Press, number 9781107400115, October.
    8. Randolph Luca Bruno & Maria Cipollina, 2018. "A meta†analysis of the indirect impact of foreign direct investment in old and new EU member states: Understanding productivity spillovers," The World Economy, Wiley Blackwell, vol. 41(5), pages 1342-1377, May.
    9. Bas Straathof & Gert Jan Linders & Arjan Lejour & Jan Möhlmann, 2008. "The internal market and the Dutch economy: implications for trade and economic growth," CPB Document 168, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Philip R. Lane & Gian Maria Milesi-Ferretti, 2008. "International Investment Patterns," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 538-549, August.
    11. Harald Badinger, 2007. "Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Mark‐up Ratios in EU Industries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(4), pages 497-519, August.
    12. Marcos Sanso‐Navarro, 2011. "The Effects on American Foreign Direct Investment in the United Kingdom from Not Adopting the Euro," Journal of Common Market Studies, Wiley Blackwell, vol. 49(2), pages 463-483, March.
    13. Campos, Nauro F. & Coricelli, Fabrizio & Moretti, Luigi, 2019. "Institutional integration and economic growth in Europe," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 88-104.
    14. José de Sousa & Julie Lochard, 2011. "Does the Single Currency Affect Foreign Direct Investment?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(3), pages 553-578, September.
    15. Fally, Thibault, 2015. "Structural gravity and fixed effects," Journal of International Economics, Elsevier, vol. 97(1), pages 76-85.
    16. Sondermann, David & Vansteenkiste, Isabel, 2019. "Did the euro change the nature of FDI flows among member states?," Working Paper Series 2275, European Central Bank.
    17. Nicholas Bloom & Christos Genakos & Raffaella Sadun & John Van Reenen, 2011. "Management Practices Across Firms and Countries," CEP Discussion Papers dp1109, Centre for Economic Performance, LSE.
    18. Kyriacos Aristotelous & Stilianos Fountas, 1996. "An Empirical Analysis of Inward Foreign Direct Investment Flows in the EU with Emphasis on the Market Enlargement Hypothesis," Journal of Common Market Studies, Wiley Blackwell, vol. 34(4), pages 571-583, December.
    19. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
    20. David Greenaway & Richard Kneller, 2007. "Firm heterogeneity, exporting and foreign direct investment," Economic Journal, Royal Economic Society, vol. 117(517), pages 134-161, February.
    21. Nuno Crespo & Maria Paula Fontoura, 2007. "Integration of CEECs into EU Market: Structural Change and Convergence," Journal of Common Market Studies, Wiley Blackwell, vol. 45(3), pages 611-632, September.
    22. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    23. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    24. Baldwin, Richard, 2007. "Trade Effects of the Euro: a Comparison of Estimators," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 22, pages 780-818.
    25. Charles WYPLOSZ, 2006. "Deep Economic Integration: Is Europe a Blueprint?," Asian Economic Policy Review, Japan Center for Economic Research, vol. 1(2), pages 259-279, December.
    26. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    27. John H. Dunning, 1997. "The European Internal Market Programme and Inbound Foreign Direct Investment," Journal of Common Market Studies, Wiley Blackwell, vol. 35(1), pages 1-30, March.
    28. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    29. Petroulas, Pavlos, 2007. "The effect of the euro on foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1468-1491, August.
    30. Christopher Taylor, 2008. "Foreign direct investment and the euro: the first five years," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 32(1), pages 1-28, January.
    31. Jonathan E. Haskel & Sonia C. Pereira & Matthew J. Slaughter, 2007. "Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 482-496, August.
    32. Estrin, Saul & Meyer, Klaus E. & Pelletier, Adeline, 2018. "Emerging Economy MNEs: How does home country munificence matter?," Journal of World Business, Elsevier, vol. 53(4), pages 514-528.
    33. repec:bla:jcmkts:v:45:y:2007:i::p:611-632 is not listed on IDEAS
    34. Baier, Scott L. & Bergstrand, Jeffrey H., 2009. "Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation," Journal of International Economics, Elsevier, vol. 77(1), pages 77-85, February.
    35. Bruce A. Blonigen & Jeremy Piger, 2019. "Determinants of Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 1, pages 3-54, World Scientific Publishing Co. Pte. Ltd..
    36. Scott L. Baier & Jeffrey H. Bergstrand & Peter Egger & Patrick A. McLaughlin, 2008. "Do Economic Integration Agreements Actually Work? Issues in Understanding the Causes and Consequences of the Growth of Regionalism," The World Economy, Wiley Blackwell, vol. 31(4), pages 461-497, April.
    37. Richard Baldwin, 1989. "The Growth Effects of 1992," NBER Working Papers 3119, National Bureau of Economic Research, Inc.
    38. Baier, Scott L. & Bergstrand, Jeffrey H. & Feng, Michael, 2014. "Economic integration agreements and the margins of international trade," Journal of International Economics, Elsevier, vol. 93(2), pages 339-350.
    39. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    40. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
    41. El-Agraa,Ali M., 2011. "The European Union," Cambridge Books, Cambridge University Press, number 9781107007963, October.
    42. Bergstrand, Jeffrey H. & Egger, Peter, 2007. "A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises," Journal of International Economics, Elsevier, vol. 73(2), pages 278-308, November.
    43. David G. Mayes, 1978. "The Effects Of Economic Integration On Trade," Journal of Common Market Studies, Wiley Blackwell, vol. 17(1), pages 1-25, September.
    44. Gopinath, G. & Helpman, . & Rogoff, K. (ed.), 2014. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 4, number 4.
    45. Jörg König & Renate Ohr, 2013. "Different Efforts in European Economic Integration: Implications of the EU Index," Journal of Common Market Studies, Wiley Blackwell, vol. 51(6), pages 1074-1090, November.
    46. Michelle Egan & Maria Helena Guimarães, 2017. "The Single Market: Trade Barriers and Trade Remedies," Journal of Common Market Studies, Wiley Blackwell, vol. 55(2), pages 294-311, March.
    47. John H. Dunning, 1997. "The European Internal Market Programme and Inbound Foreign Direct Investment," Journal of Common Market Studies, Wiley Blackwell, vol. 35(2), pages 189-223, June.
    48. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December.
    49. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Felbermayr, Gabriel & Gröschl, Jasmin & Heiland, Inga, 2022. "Complex Europe: Quantifying the cost of disintegration," Journal of International Economics, Elsevier, vol. 138(C).
    2. Alfred A. Haug & Anh T. N. Nguyen & P. Dorian Owen, 2023. "Do the determinants of foreign direct investment have a reverse and symmetric impact on foreign direct divestment?," Empirical Economics, Springer, vol. 64(2), pages 659-680, February.
    3. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2022. "Which are the long-run determinants of US outward FDI? Evidence using large long-memory panels," Working Papers 2210, Department of Applied Economics II, Universidad de Valencia.
    4. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2022. "A fresh assessment of the euro effect on outward US FDI," Working Papers 2209, Department of Applied Economics II, Universidad de Valencia.
    5. Camarero, Mariam & Moliner, Sergi & Tamarit, Cecilio, 2024. "A Fresh Assessment of the Depth of the “Euro Effect" on US FDI," Single Market Economics Papers WP2024/18, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (European Commission), Chief Economist Team.
    6. Alexandra Horobet & Oana Cristina Popovici & Emanuela Zlatea & Lucian Belascu & Dan Gabriel Dumitrescu & Stefania Cristina Curea, 2021. "Long-Run Dynamics of Gas Emissions, Economic Growth, and Low-Carbon Energy in the European Union: The Fostering Effect of FDI and Trade," Energies, MDPI, vol. 14(10), pages 1-30, May.
    7. Michele Imbruno, & Rosanna Pittiglio, & Filippo Reganati,, 2024. "How do foreign-owned suppliers affect economic performance? Evidence from Italian manufacturing firms," International Economics, Elsevier, vol. 178(C).
    8. Emily Blanchard & Amelia U. Santos-Paulino & Claudia Trentini & Emanuel Milet, . "Implications of rising trade tensions for FDI projects," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    9. Jean-François Hennart & Dylan Sutherland, 2022. "International business research: The real challenges are data and theory," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(9), pages 2068-2087, December.
    10. Siedschlag, Iulia & Yan, Weijie, 2021. "Enhancing the attractiveness of the all-island economy to high-value sectors," Research Series, Economic and Social Research Institute (ESRI), number RS133.
    11. Bettina Meinhart, "undated". "How EU membership affects foreign direct investment: Differences between EU15 and CEE countries," FIW Working Paper series 197, FIW.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bruno, Randolph Luca & Campos, Nauro & Estrin, Saul & Tian, Meng, 2017. "Economic integration, foreign investment and international trade: the effects of membership of the European Union," LSE Research Online Documents on Economics 86615, London School of Economics and Political Science, LSE Library.
    2. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2021. "Is there a euro effect in the drivers of US FDI? New evidence using Bayesian model averaging techniques," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(4), pages 881-926, November.
    3. Bruno, Randolph Luca & Campos, Nauro & Estrin, Saul & Tian, Meng, 2016. "Foreign direct investment and the relationship betweenthe United Kingdom and the European Union," LSE Research Online Documents on Economics 69025, London School of Economics and Political Science, LSE Library.
    4. (ed.), 0. "Research Handbook on Economic Diplomacy," Books, Edward Elgar Publishing, number 16053.
    5. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2019. "Searching The Us Fdi Determinants In The Eu: Is There A Euro Effect?," Working Papers 1916, Department of Applied Economics II, Universidad de Valencia.
    6. Baier, Scott L. & Yotov, Yoto V. & Zylkin, Thomas, 2019. "On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration," Journal of International Economics, Elsevier, vol. 116(C), pages 206-226.
    7. Maria Borga & Perla Ibarlucea Flores & Monika Sztajerowska, 2020. "Drivers of divestment decisions of multinational enterprises - A cross-country firm-level perspective," OECD Working Papers on International Investment 2019/03, OECD Publishing.
    8. Holger Breinlich & Swati Dhingra & Saul Estrin & Hanwei Huang & Gianmarco Ottaviano & Thomas Sampson & John Van Reenen & Jonathan Wadsworth, 2016. "BREXIT 2016: Policy Analysis from the Centre for Economic Performance," CEP Brexit Analysis Papers 08, Centre for Economic Performance, LSE.
    9. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 2, pages 15-78, Edward Elgar Publishing.
    10. Pierluigi Montalbano & Silvia Nenci & Laura Dell'Agostino, 2019. "A non-parametric re-assessment of the trade effects of the euro using value added data," Working Papers 9/19, Sapienza University of Rome, DISS.
    11. Silviano Esteve-Pérez & Salvador Gil-Pareja & Rafael Llorca-Vivero & Jordi Paniagua, 2021. "Has the Euro paid off? A study of the trade-induced welfare effects of the EMU," Working Papers 2103, Department of Applied Economics II, Universidad de Valencia.
    12. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    13. Fernando Mistura & Caroline Roulet, 2019. "The determinants of Foreign Direct Investment: Do statutory restrictions matter?," OECD Working Papers on International Investment 2019/01, OECD Publishing.
    14. Anderson, James E. & Borchert, Ingo & Mattoo, Aaditya & Yotov, Yoto V., 2018. "Dark costs, missing data: Shedding some light on services trade," European Economic Review, Elsevier, vol. 105(C), pages 193-214.
    15. Rutger Teulings, 2017. "Brexit and The Impact of Gradual Economic Integration on Export," Tinbergen Institute Discussion Papers 17-075/VI, Tinbergen Institute.
    16. Christian Buelens & Marcel Tirpák, 2017. "Reading the Footprints: How Foreign Investors Shape Countries’ Participation in Global Value Chains," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(4), pages 561-584, December.
    17. Bergstrand, Jeffrey H. & Larch, Mario & Yotov, Yoto V., 2015. "Economic integration agreements, border effects, and distance elasticities in the gravity equation," European Economic Review, Elsevier, vol. 78(C), pages 307-327.
    18. Sylvanus Kwaku Afesorgbor, 2013. "Revisiting the Effectiveness of African Economic Integration. A Meta-Analytic Review and Comparative Estimation Methods," Economics Working Papers 2013-13, Department of Economics and Business Economics, Aarhus University.
    19. Henk L. M. Kox & Hugo Rojas‐Romagosa, 2020. "How trade and investment agreements affect bilateral foreign direct investment: Results from a structural gravity model," The World Economy, Wiley Blackwell, vol. 43(12), December.
    20. Chenaf-Nicet, Dalila & Rougier, Eric, 2016. "The effect of macroeconomic instability on FDI flows: A gravity estimation of the impact of regional integration in the case of Euro-Mediterranean agreements," International Economics, Elsevier, vol. 145(C), pages 66-91.

    More about this item

    Keywords

    single market; Structural Gravity Model; economic integration; foreign direct investment; European Union;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp13668. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.