An Empirical Analysis of Inward Foreign Direct Investment Flows in the EU with Emphasis on the Market Enlargement Hypothesis*

Kyriacos Aristotelous · Stilianos Fountas

73 citations0/0 files storedJCMS Journal of Common Market Studies

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International Business and FDI Global trade and economics International Arbitration and Investment Law

Abstract

Abstract We use a cross‐section, time‐series approach to study the determinants of foreign direct investment (FDI) in the European Union (EU) with particular emphasis on the expectations of a single market following the Single European Act of 1987. Using annual data from the 1980s and early 1990s, we investigate the determinants of US and Japanese FDI in the EU by pooling the data by the host country. We find strong evidence in favour of a single market effect where the anticipation of a larger market size due to a barriers free European market leads to an increase in the inflows of FDI. In addition, our estimation results show that FDI flows in the EU also depend on market size and the real exchange rate (as a proxy of relative labour costs).

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References

1976The Future of the Multinational Enterprise 1994Multinational enterprises and the global economy 1980Determinants of foreign direct investment: A survey 1985The Economic Theory of the Multinational Enterprise 1988The locational determinants of direct investments among industrialized countries 1992The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects 1994The real exchange rate and foreign direct investment in the United States 1983Determinants of U.S. direct investment in the E.E.C.

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