Outward Migration and Inward FDI: Factor Mobility between Eastern and Western Europe

A growing strand of literature highlights that migration may favor growth-enhancing technology transfer, trade, and foreign direct investments between the source and the host economies of migrants (network effects). A specific channel is explored through which the possible diaspora externality associated with the emigration of workers may occur: the removal of informational, cultural, and reputational barriers that could prevent firms of high-income countries from investing in the low-income immigrants' economies of origin. By means of a straightforward gravity specification, a fragmentation and multinational production model is taken to the data. The focus is on the mobility of capital and workers between the advanced European Union countries (EU15) and New Member States (NMS) in the 19952007 period. The evidence points to a significant correlation between the volume of EU15's activities in NMS and the total stock of NMS's own-migrants in the EU15 economies.