Foreign Direct Investment and the Single Market
Centro Studi Luca d'Agliano - Queen Elizabeth House Development Studies Working Paper No. 160
33 Pages Posted: 21 Jan 2002
There are 2 versions of this paper
Foreign Direct Investment and the Single Market
Foreign Direct Investment and the Single Market
Date Written: November 2001
Abstract
The reduction in barriers to trade within the European Union has had important but disputed effects on inward direct investment. On the one hand, fears have been expressed that the Union could become a "Fortress Europe", with foreign firms effectively excluded from the internal market. On the other hand, there is considerable empirical evidence for the importance of the Single Market in encouraging more foreign direct investment into the European Union. (See Neven and Siotis (1996) and Pain (1997), for example.) In the case of smaller and more peripheral countries, such as Ireland, Spain and Portugal, this effect has been particularly significant. (See Barry (1999), for example.) Of course, empirical work tends to concentrate on those firms which have in fact located in the EU, and hance may miss the "Sherlock Holmes" cases: potential multinationals which, like the dog that did not bark in the night, have chosen not to locate in or even to supply EU markets.
In this paper, I present a simple framework in which some of these issues can be cvonsidered. I focus on a single industry (so general equilibrium repercussions are ignored), and on the location decisions of a single potential multinational firm. I begin by paying more attention than usual to the non-strategic bench-mark case where the multinational firm has a monopoly and faces no competition from domestic firms. Subsequently I relax this assumption, but even then I simplify by allowing a limited role for domestic firms.
Keywords: Foreign direct investment, Market integration, Multinational corporations, Single market
JEL Classification: F15, F23, F12
Suggested Citation: Suggested Citation