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

Author

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  • Baldwin, R.E.
  • Forslid, R.
  • Haaland, J.I.

Abstract

This paper studies the investment creation and diversion effects of the EU's Single Market programme (EU92). We first present empirical evidence which suggests that EU92 caused investment diversion in the European Free Trade Association (EFTA) nations and investment creation in the EU. The economic logic behind this is simple. Discriminatory liberalization shifts production of tradable goods from nonintegrating countries to the integrating region. Since tradable sectors are capital intensive relative to nontraded sectors, the production shifting raises the rental rate in the integrating regions, lowering it elsewhere. Investment creation and diversion is the result. To simulate what would have occurred if the EFTAns had never gained access to EU92 (via EU membership or the European Economic Area), we employ a computable general equilibrium model with endogenous capital stocks. The results show a modest drop in EFTA capital stocks when they are excluded from EU92, but an important rise (almost 5%) when they are included. In terms of real income, the difference between the included and excluded cases is quite large for the EFTAns (5.5% of GDP). In all cases, the EU experiences investment creation and income gains. The effects on the US and Japan are trivially small, but mostly negative in terms of capital stocks and real income.
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Suggested Citation

  • Baldwin, R.E. & Forslid, R. & Haaland, J.I., 1995. "Investment Creation and Investment Diversion: Simulation Analysis of the Single Market Programme," Papers 23/95, Norwegian School of Economics and Business Administration-.
  • Handle: RePEc:fth:norgee:23/95
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    References listed on IDEAS

    as
    1. Baldwin, Richard E, 1992. "Measurable Dynamic Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 162-174, February.
    2. Haaland, J.I. & Wooton, I., 1991. "Market Integration, Competition, and Welfare," Papers 499, Stockholm - International Economic Studies.
    3. Gasiorek, Michael & Smith, Alasdair & Venables, Anthony J, 1992. "`1992': Trade and Welfare; A General Equilibrium Model," CEPR Discussion Papers 672, C.E.P.R. Discussion Papers.
    4. 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.
    5. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the internal market in the European Community : Some industry simulations," European Economic Review, Elsevier, vol. 32(7), pages 1501-1525, September.
    6. Haaland, Jan I. & Norman, Victor D, 1992. "Global Production Effects of European Integration," CEPR Discussion Papers 669, C.E.P.R. Discussion Papers.
    7. Baldwin,Richard & Haapararanta,Pertti & Kiander,Jaakko (ed.), 1995. "Expanding Membership of the European Union," Cambridge Books, Cambridge University Press, number 9780521481342, May.
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    More about this item

    Keywords

    INVESTMENTS;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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