An Empirical Analysis of Inward Foreign Direct Investment Flows in the European Union with Emphasis on the Market Enlargement Hypothesis

Kyriacos Aristotelous and Stilianos Fountas

No 4, Working Papers from National University of Ireland Galway, Department of Economics

Abstract: We use cross-section, time-series approach to study the determinants of foreign direct investment (FDI) in the European Union with particular emphasis on the expectations of a Single Market following the Single European Act of 1987. Using annual data from the 1980s, we investigate the determinants of US and Japanese FDI in the EU by pooling the data by the host country. We find strong evidence in favour of a Single Market effect where the anticipation of a larger market size due to a barriers-free European market leads to an increase in tne inflows of FDI. In addition, our estimation results show that FDI flows in the EU also depend on market size and the real exchange rate (as a proxy of relative labour costs).

Date: 1995, Revised 1995
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Published in the Journal of Common Market Studies

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