IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Investment Creation and Investment Diversion: Simulation Analysis of the Single Market Programme

  • Baldwin, Richard
  • Forslid, Rikard
  • Haaland, Jan I.

This paper studies the investment creation and investment diversion effects of the EU's Single Market programme (EU92). We find suggestive, but not conclusive, evidence indicating that EU92 may have led to investment diversion in the economies of the European Free Trade Association (EFTA) and investment creation in the EU economies. We argue that a simple mechanism, based on the derived demand for capital can account for this. Discriminatory liberalization shifts production from excluded countries to the integrating region. Since EU92 focused on tradable sectors and these are capital intensive, the production shifting raises the rental rate in the integrating regions, lowering it elsewhere. This leads to investment creation and diversion. Results from our simulations show that investment diversion does occur for the EFTA6 (namely, the EFTA6 steady-state capital stock drops by two-thirds of a percent) when the EU's liberalization (EU92) involves market integration in addition to real trade cost reduction. When EU92 is extended to include the EFTA6, EFTA6 capital stocks rise by almost 5%. In terms of real income, the difference between the EFTA6-included and EFTA6-excluded cases is quite large for the EFTAns amounting to 5.5% of GDP. In all cases, the EU experiences investment creation (equal to approximately one-fifth of a percent of their initial capital stock) and real income gains (equal to 1.75% of GDP). The effects on the United States and Japan are trivially small, but mostly negative in terms of capital stocks and real income.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1308
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1308.

as
in new window

Length:
Date of creation: Dec 1995
Date of revision:
Handle: RePEc:cpr:ceprdp:1308
Contact details of provider: Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644 Elsevier.
  2. Baldwin, Richard E, 1992. "Measurable Dynamic Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 162-74, February.
  3. Smith, Alasdair & Venables, Anthony J, 1988. "Completing the Internal Market in the European Community: Some Industry Simulations," CEPR Discussion Papers 233, C.E.P.R. Discussion Papers.
  4. repec:cup:cbooks:9780521481342 is not listed on IDEAS
  5. Haaland, Jan I. & Norman, Victor D, 1992. "Global Production Effects of European Integration," CEPR Discussion Papers 669, C.E.P.R. Discussion Papers.
  6. Haaland, Jan I. & Wooton, Ian, 1991. "Market Integration, Competition and Welfare," CEPR Discussion Papers 574, C.E.P.R. Discussion Papers.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1308. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.