New Members in the European Union and Foreign Direct Investment

The expansion of the European Union in 2004 to new members from beyond the former Iron Curtain could boost the competitiveness of firms located in the enlarged Union. The competitive advantage of new locations is derived from labor productivity-not from lower taxes and large transfers from the European Union budget, as is sometimes claimed. Compared to opportunities, the foreign direct investment inflows of the new members have been so far small and slow-growing. Part of this performance may be due to the wrapping up of privatizations and the slow take-off of large green-field projects in those countries. Part of the blame, however, goes to protectionist pressures in the old members of the Union, prompted by fears of massive relocation of economic activities to new members. (C) 2006 Wiley Periodicals, Inc.