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: cepr.org/active/publications/discussion_papers/dp.php?dpno=3419

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.