EU enlargements and U.S. FDI flows in the six core states

This paper addresses an under-researched question of whether regional integration with lower-income countries results in displacement of foreign direct investment (FDI) from high-income countries. Difference-in-differences (DID) estimations are used to, respectively, analyse the effects of the 1986 enlargement and the 2004/2007 enlargement of European Union (EU) on U.S. FDI flows into the EU core states. The results reveal a negative impact of the 1986 enlargement on EP FDI and positive effects of the 2004/2007 enlargement on EP and vertical FDI. The comparative analysis demonstrates that the impact of regional integration depends on the relative strength of a few factors determined by the circumstance. High-income countries do not necessarily lose FDI following an integration with lower-income countries. While the integration tends to divert labour-cost sensitive EP FDI away from the high-income members, as long as the high-income members adaptively go through industrial restructuring and take full advantage of the expanded production networks in response to the newly integrated regional environment, they are likely to become more resilient and competitive in the regional and global markets and reap the benefits of integration.