Economic integration and FDI location: Is there a border effect within the enlarged EU?

Abstract

AbstractThis paper examines how integration affects Foreign Direct Investment location in relation to a newly internalised border. It focuses on the fifth European Union enlargement that integrated the Central and Eastern European Countries. Using a spatial autoregressive model, 35,103 FDI location decisions are analysed for Europe at a NUTS-2 regional level over 1997–2010. It finds no distance effect in FDI location prior to enlargement, but after this time FDI is 37% higher in the CEEC regions that are contiguous with the newly internalised border. This is not explained by a national border effect that occurs throughout the union, nor by a drop in FDI in the border regions of the old Member States, but rather it is consistent with improved market access from the removal of the border checks. Along the internalised border it amounts to an extra 60 FDI projects and 13,600 gross jobs per annum, which is up to 2000 investments in the long-run. The results have implications for economic development and cohesion of the enlarged union.