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Real capital market integration in the EU: How far has it gone? What will the effect of the euro be?

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  • Georges de Ménil

Abstract

Much effort has been devoted to the study of financial market integration in Europe. Little is known, however, about real capital market integration - the degree to which plants and equipment move to take advantage of locally high returns. This paper looks at the evidence. An analysis of flows of foreign direct investment in Europe shows that integration was quite limited in the early 1980s, but has increased considerably since then. Another analysis looks at rates of return of a large number of firms. It reveals that country-specific factors play a significant role in explaining corporate returns, even after taking risk into account. This finding is incompatible with the CAPM definition of market integration. The view that integration is limited in Europe is further strengthened when the same approach is carried out for the USA and Canada. Part of the national specificity appears to be related to labour and goods market regulations, which harm firms profitability. If, by introducing more transparency and eliminating currency risk, EMU strengthens competition on the real capital market, one obvious economic benefit will be a more rational and efficient use of capital, but the most important potential consequences are political. Special-interest regulations of an exclusively national nature will not survive. They will either fall in a wave of internationalist liberalization, or become embedded in 'harmonized' regulations at the federal level. A reduction in excessive regulatory burdens, notably in the labour market, could lead to substantial and shared productivity gains. Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1999.

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 14 (1999)
Issue (Month): 28 (04)
Pages: 165-201

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Handle: RePEc:bla:ecpoli:v:14:y:1999:i:28:p:165-201

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Cited by:
  1. Schmidt, Christian W. & Broll, Udo, 2008. "The effect of exchange rate risk on US foreign direct investment: an empirical analysis," Dresden Discussion Paper Series in Economics 09/08, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  2. Mahesh Kumar Tambi, 2005. "Integration Of Financial Markets," Finance 0504014, EconWPA.
  3. Yamamoto, Kazuhiro, 2008. "Location of industry, market size, and imperfect international capital mobility," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 518-532, September.
  4. Laura Márquez-Ramos, 2011. "European Accounting Harmonisation: Consequences of IFRS Adoption on Trade in Goods and Foreign Direct Investments," Working Papers 2011/08, Economics Department, Universitat Jaume I, Castellón (Spain).
  5. Costas Azariadis & Christopher Pissarides, 2007. "Unemployment dynamics with international capital mobility," LSE Research Online Documents on Economics 2476, London School of Economics and Political Science, LSE Library.
  6. Martin Gassebner & Pierre-Guillaume Méon, 2010. "Where do Creditor Rights Matter? Creditor Rights, Political Constraints, and Cross-Border M&A Activity," Working Papers CEB 10-019.RS, ULB -- Universite Libre de Bruxelles.
  7. Andrew Hallett, 2002. "Britain and the euro," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 335-348, September.

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