The Process of European Integration and the Determinants of Entry by non–EU Multinationals in UK Manufacturing

Abstract

I seek to evaluate the influence of the European Internal Market Programme on the relative significance of the determinants of entry (via acquisitions and start–ups) by non–EU multinationals in some 102 UK manufacturing sectors. The occurrence of foreign direct investment (FDI) is modelled as a two–step process in which factors affecting whether a sector gets any entry by foreign plants are first considered, and the determinants of the count of entries for those sectors that attract positive flow of FDI are then investigated. The empirical estimates point to the conclusion that the parameters of the FDI functions have changed in response to the challenges and opportunities created by increasing economic integration, but with some interesting contrasts between the two types of entries. Acquisition FDI appears to have become more responsive to the size of the European market and unit labour costs relative to the rest of the EU, and less sensitive to the local market size. It is also increasingly being concentrated in sectors with higher intra–EU export propensity, consistent with the predominance of vertical FDI. By contrast, the significance of the size of the UK market has not diminished in the greenfield investment model, and the importance of agglomeration economies has more than doubled during the process of integration. Since the FDI consequences of European integration vary according to the mode of foreign entry, the policy implications of our findings also depend on the type of FDI under consideration.

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