FDI determinants in Europe and Chinese influence
Abstract
Despite recent concerns about the increasing influence of outside investors on the European Union (EU) and Western Balkans, the developed European countries are still a dominant source of foreign direct investment (FDI) in the region, confirming the benefits of EU membership. At the same time, fast-growing connectivity and lower trade costs in accession and neighboring countries determine the FDI growth from China, particularly via the Belt and Road Initiative (BRI). By applying panel data over 2000-2019 for 34 countries, which form 89% of all European FDI, we first examine FDI patterns around Europe, compare the EU, NMS, and Western Balkans; verify the importance of EU membership for FDI, caused reducing trade costs and improving connectivity. Thus, the new EU member states (NMS) and Western Balkans appear both as a home country and as a pre- entry destination to the EU. Then, we calculate trade costs indices for each selected country and partners over time and find that Europe and China are closely interconnected through trade and FDI. It means that stronger ties with China can be realized for the sample countries at the cost of easing relations with the EU. Finally, incorporating trade costs indices into the FDI model; we evaluate the impact of connectivity on FDI and estimate how BRI affected FDI in Europe. Additionally, we validate that the old framework of horizontal and vertical FDI not representative well and even new complex vertical or export-oriented FDI strategies are shifting today.
References
Asiedu, E. (2002). On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different? World Development, 30 (1), 107-119.
Asiedu, E. (2006). Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. The World Economy, 29 (1), 63-77.
Baltagi, B.H., Egger, P.H., & Pfafermayr, M. (2007). Estimating Regional Trade Agreement Effects on FDI in an Interdependent World. Syracuse University – Maxwell School of Citizenship and Public Affairs Center for Policy Research Working Paper No. 100. Retrieved from http://dx.doi.org/10.2139/ssrn.1809094
Bevan, A., Estrin, S., & Meyer, K. (2004). Foreign investment location and institutional development in transition economies. International Business Review, 13 (1), 43–64.
Blonigen, B.A., Davies, R.B., Waddell, G.R., & Naughton, H.T. (2007). FDI in space: Spatial autoregressive relationships in foreign direct investment. European Economic Review, 51 (5), 1303-1335.
Bruno, R., Campos, N., Estrin, S., & Meng, T. (2017). Economic integration, foreign investment and international trade: the effects of membership of the European Union. LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library. Retrieved from https://EconPapers.repec.org/RePEc:ehl:lserod:86615.
Canh, N.P., Binh, N.T., Thanh, S.D., & Schinckus, C. (2020). Determinants of foreign direct investment inflows: The role of economic policy uncertainty. International Economics, 161 (C), 159-172.
Chen, M.X. & Lin, C. (2018). Foreign Investment across the Belt and Road: Patterns, Determinants, and Effects. Policy Research Working Paper; No. 8607. World Bank. Retrieved from https://openknowledge.worldbank.org/handle/10986/30577
Dunning, J.H. (1973). The Determinants of International Production. Oxford Economic Papers New Series, 25 (3), 289–336.
Dunning, J.H., & Lundan, S.M. (2008). Institutions and the OLI Paradigm of the Multinational Enterprise. Asia Pacific Journal of Management, 25 (4), 573-593.
Feenstra, R.C., Inklaar, R. & Timmer, M. P. (2015). The Next Generation of the Penn World Table",American Economic Review, 105(10), 3150-3182. available for download at:www.ggdc.net/pwt<https://www.rug.nl/ggdc/productivity/pwt/related-research>
Helpman, E. (1984). A Simple Theory of Trade With Multinational Corporations. Journal of Political Economy, 92 (3), 451-471.
Helpman, E. (2006). Trade, FDI, and the Organization of Firms. Journal of Economic Literature, 44 (3), 589-630.
Jirasavetakul, L.F., & Rahman, J. (2018). Foreign Direct Investment in New Member States of the EU and Western Balkans: Taking Stock and Assessing Prospects. IMF Working Papers, 18/187.
Jungbluth, C. (2019). Tracing three decades of foreign direct investment booms and busts and their recent decline. Blog global Economic Dynamics. Retrieved from https://ged-project.de/allgemein-en/foreign-direct-investment/
Kano, L., & Oh, C.H. (2020). Global Value Chains in the Post COVID World: Governance for Reliability. Journal of Management Studies, 57 (8), 1773-1777.
Markusen, J.R. (1984). Multinationals, Multi-plant Economies, and the Gains from Trade. Journal of International Economics, 16 (3-4), 205-226.
Markusen, J.R. (2000). Foreign Direct Investment, CIES Working Paper No. 19. Retrieved from http://dx.doi.org/10.2139/ssrn.231202
Markusen, J. R. (2002). Multinational firms and the theory of international trade. Cambridge: MIT Press.
Mistura, F., & Roulet, C. (2019). The determinants of Foreign Direct Investment: Do statutory restrictions matter?, OECD Working Papers on International Investment, No. 2019/01. OECD Publishing, Paris, France.
Novy, D. (2011). Gravity Redux: Measuring International Trade Costs with Panel Data. CESifo Working Paper Series No. 3616, CESifo. Retrieved from https://ideas.repec.org/p/ces/ceswps/_3616.html
Smarzynska, B.K., & Wie, S.J. (2000). Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence, Policy Research Working Paper, No. 2360. World Bank, Washington, DC.
Welfens, P.J.J., & Baier, F.J. (2018). BREXIT and Foreign Direct Investment: Key Issues and New Empirical Findings. International Journal of Financial Studies, 6 (2), 46-67.
World investment report. (2020). Retrieved from: https://unctad.org/en/PublicationsLibrary/wir2020_en.pdf
The Author wishes to submit the Work to SJM for publication. To enable SJM to publish the Work and to give effect to the parties’ intention set forth herein, they have agreed to cede the first right to publication and republication in the SJM Journal.
Cession
The Author hereby cedes to SJM, who accepts the cession, to the copyright in and to the paper.
The purpose of the cession is to enable SJM to publish the Work, as first publisher world-wide, and for republication in the SJM Journal, and to grant the right to others to publish the Work world-wide, for so long as such copyright subsists;
SJM shall be entitled to edit the work before publication, as it deems fit, subject to the Authors approval
The Author warrants to SJM that:
- the Author is the owner of the copyright in the Work, whether as author or as reassigned from the Author’s employee and that the Author is entitled to cede the copyright to SJM;
- the paper (or any of its part) is not submitted or accepted for publication in any other Journal;
- the Work is an original work created by the Author;
- the Author has not transferred, ceded, or assigned the copyright, or any part thereof, to any third party; or granted any third party a licence or other right to the copyright, which may affect or detract from the rights granted to SJM in terms of this agreement.
The Author hereby indemnifies the SJM as a body and its individual members, to the fullest extent permitted in law, against all or any claims which may arise consequent to the warranties set forth.
No monetary consideration shall be payable by SJM to the Author for the cession, but SJM shall clearly identify the Author as having produced the Work and ensure that due recognition is given to the Author in any publication of the Work.
Should SJM, in its sole discretion, elect not to publish the Work within 1 year after the date of this agreement, the cession shall lapse and be of no further effect. In such event the copyright shall revert to the Author and SJM shall not publish the Work, or any part thereof, without the Author’s prior written consent.