Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: This chapter assesses the effects of "Eastern" EU-enlargement on the race for FDI and the policy implications. We start from the proposition that the evolving production patterns of incumbent and new member states determine the need for and the justification of location policy (LP) and FDI promotion policy (FDI-PP). On the basis of empirical production patterns, it is argued that while the specialisation outcome dominates in the short run, the convergence scenario is more likely to prevail in the medium term. Therefore, old and new EU-members will compete increasingly for the same type of FDI. How EU-enlargement per se affects the spatial distribution of inward FDI is described next. The role of FDI-PPs and LPs in an enlarged EU are discussed on the basis of the convergence outcome. Since the new economics of location competition and of FDI-promotion cast serious doubt on the economic justification and effectiveness of FDI-PP, the chapter concludes with a basic dilemma in the race for FDI: namely, the greater ineffectiveness of FDI incentives in the Single Market and fewer possibilities for differentiation of LPs. The latter is due to harmonisation pressures, which calls for innovative policy strategies by central and regional authorities.

JEL-codes: F2; L6 January 2004

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