A Gravity Model Analysis of FDI across EU Member States

While recent debates about European integration focus mainly on the losses from dissolutions, a remarkable rise in foreign direct investment (FDI) in the accession countries has become increasingly evident as a benefit of the European Union (EU) membership, which makes EU membership a key FDI determinant. By applying an augmented gravity model (rather than standard gravity variables), covering 39 host and home countries over 1991-2017, we investigated specific factors in explaining FDI inflows, with a focus on the new member EU states. Empirically, we created a series of ordinary least squares and Poisson Pseudo-Maximum-Likelihood models to account for all country-time-specific and country-pair factors. This paper verifies that EU membership has a positive and significant effect on FDI, between 1991 and 2017 FDI inflows became greater, on average, by approximately 23%. After EU enlargement, more FDI came from EU members to the new EU member countries and less came from non-EU member countries.