DP3419 Foreign Direct Investment and the Single Market

Author(s): J. Peter Neary

Publication Date: June 2002

Keyword(s): foreign direct investment , market integration , multinational corporations , single market

JEL(s): F12 , F15 , F23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP3419.asp

This Paper extends the theory of multinational corporations, identifying three distinct influences of internal trade liberalization by a group of countries on the level and pattern of inward foreign direct investment (FDI). First, the tariff-jumping motive encourages plant consolidation. Second, the export platform motive favours FDI with only a single union plant relative to exporting, and may induce a firm that has never exported to invest. Finally, reduced internal tariffs increase competition from domestic firms, which dilutes the other motives and may induce a ‘Fortress Europe’ outcome of multinationals leaving union markets even though external tariffs are unchanged.