Foreign Direct Investment and the Single Market

Abstract

This paper extends the theory of multinational corporations, identifying three distinct influences of internal trade liberalisation 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 which 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.

JEL Codes: F10, F12

Presented to a Conference on Foreign Direct Investment and Economic Integration, University of Nottingham, 29-30 June 2001; published in The Manchester School, 70:3, June 2002, 291-314.

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