Motives for foreign direct investment location in Europe and EU enlargement

Abstract

European Union (EU) enlargement of the mid-2000s is likely to have changed the motives for foreign direct investment (FDI) location between the existing Member States (the EU15) and the new entrants of Central and Eastern Europe (CEECs), but it is poorly understood. This paper uses the framework of Dunning’s eclectic paradigm and data for 35,105 foreign investments in Europe not only to examine if the motives differ between these, but also how they are affected by the enlargement. Three asset-exploiting motives of market, resource and efficiency seeking are explored using a conditional logit model for the location choice. This is separately for greenfield and brownfield FDI, involving new facilities or jobs, where the latter is efficiency seeking from an expansion or a co-location of functions. The paper finds greenfield FDI in the CEECs seeks an export platform for the EU market and a low-skilled workforce but a national market and higher skills in the EU15. Brownfield FDI differs from this for expansions only, for which the EU market is important, reflecting scale economies. Surprisingly, EU enlargement has a much stronger effect on the FDI location motives in the EU15 by increasing the importance of the European market, which is possibly because the CEEC liberalisation was ongoing throughout the accession process. The paper finds evidence that the differences in the motives between the CEECs and EU15 are narrowing over time, but they are pronounced, and it is argued that they will persist.