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Formal Integration: FDI and trade in Europe

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  • Camilla Jensen

    ()
    (Center for East European Studies, Copenhagen Business School)

Abstract

The paper seeks to explain why formal integration, i.e. membership of the European Union (EU), should matter to Central and Eastern Europe (CEE) by testing a number of hypotheses about the relationship, respective levels and intensity of relationship of the two fundamental forces of real integration: trade and foreign direct investment (FDI). It is expected that formal integration will matter to the level of flows due to a concentric bias (trade creation) arising from introducing deeper integration among countries. But the effect on FDI may be more ambiguous since a lowering of transaction cost should make firms substitute from FDI towards more trade. The analysis shows that FDI and trade are complements at the bilateral aggregate country level within Europe. The analysis also verifies that formal integration has given rise to a concentric bias, but only in the aspect of trade. While the present EU member and the new Accession countries participate equally in FDI flows. The analysis of intensity of relationship between trade and FDI, gives very strong and positive results. Contrary to earlier analysis it is found that causation is two-way and much greater for the chain of causation running from trade to FDI especially in intra-Union flows. But it is also verified that FDI is a particularly important catalyst of trade between the EU and CEE countries.

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Bibliographic Info

Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

Volume (Year): 5 (2004/2005)
Issue (Month): 1 (December)
Pages: 5-27

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Handle: RePEc:bic:journl:v:5:y:2004/2005:i:1:p:5-27

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  1. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
  2. Tiiu Paas & Raul Eamets & Jaan Masso & Marit Room, 2003. "Labour Market Flexibility And Migration In The Baltic States: Macro Evidences," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 16, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  3. Lars Calmfors, 1993. "Centralisation of Wage Bargaining and Macroeconomic Performance: A Survey," OECD Economics Department Working Papers 131, OECD Publishing.
  4. Alex Bryson, 2002. "The Union Membership Wage Premium: An Analysis Using Propensity Score Matching," CEP Discussion Papers dp0530, Centre for Economic Performance, LSE.
  5. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, vol. 85(2), pages 212-18, May.
  6. Heckman, James J. & Lalonde, Robert J. & Smith, Jeffrey A., 1999. "The economics and econometrics of active labor market programs," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 31, pages 1865-2097 Elsevier.
  7. Oswald, Andrew J, 1985. " The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 160-93.
  8. David Blanchflower & Alex Bryson, 2002. "Changes over time in union relative wage effects in the UK and the US revisited," NBER Working Papers 9395, National Bureau of Economic Research, Inc.
  9. Layard, Richard & Nickell, Stephen J., 2011. "Combatting Unemployment," OUP Catalogue, Oxford University Press, number 9780199609789 edited by Eichhorst, Werner & Zimmermann, Klaus F..
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Cited by:
  1. Sõrg, Mart & Tuusis, Danel, 2008. "Foreign banks increase the social orientation of Estonian financial sector," Wirtschaftswissenschaftliche Diskussionspapiere 01/2008, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.

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