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

Randolph Luca Bruno,Nauro Ferreira Campos,Saul Estrin

doi:10.1111/jcms.13131

Abstract

AbstractThis article 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 from 1985 to 2018, we find EU membership leads to about 60 per cent higher FDI investment into the host economy from outside the EU, and around 50 per cent higher intra‐EU FDI. Moreover, we find that the effect of EU membership on FDI is larger than from membership of the North American Free Trade Agreement, the European Free Trade Association and the Southern Common Market, and that the single market is the cornerstone of this differential impact.

Highlights

How much additional foreign direct investment (FDI) does a country receive because it chooses to engage in deep vis‐à‐vis shallow forms of integration? This is a crucial question within the European policy debate, for which, surprisingly, one still finds very few answers
We find that the premium of the EU membership is estimated to be even bigger than in the baseline scenario, the reason being that the counterfactual against which we estimate the premium is composed of countries not belonging to EU, North American Free Trade Agreement (NAFTA), European Free Trade Association (EFTA) or Mercosur
How much additional Foreign Direct Investment (FDI) does a country receive because it chooses to engage in deep vis‐à‐vis shallower forms of economic integration? This is an important question in the European policy debate for which, surprisingly, one still finds very few answers

Summary

Introduction

How much additional foreign direct investment (FDI) does a country receive because it chooses to engage in deep vis‐à‐vis shallow forms of integration? This is a crucial question within the European policy debate, for which, surprisingly, one still finds very few answers. Bilateral data on FDI inflows have recently been made available from The United Nations Conference on Trade and Development (UNCTAD) for almost every economy in the world, while previously such bilateral data as were available were restricted to Organisation for Economic Co‐operation and Development (OECD) economies (Schiavo, 2007) This enables a study of the effects of EU membership on FDI, for countries in the EU itself (De Sousa and Lochard, 2011), or between EU members and other advanced economies (Bevan and Estrin, 2004) and for the first time including FDI from emerging economies. In this article we exploit new long and global bilateral datasets, using frontier estimation methods, to provide the first robust measures of the effects of EU membership and the single market on FDI, and to compare them with the impact of other models of economic integration, including the NAFTA and Mercosur agreements. The conclusion discusses the implications for policy and future research

FDI and Integration

Data Set

Findings

Conclusions