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Investment Creation and Diversion in an Integrating Europe

This paper explores how the current and forthcoming expansions of the European Union (EU) affect foreign direct investment (FDI) inflows in the European continent. The analysis will use the theory of investment creation/diversion/restructuring, developed by Dunning & Robson (1998) as an extension of Viner's (1950) trade theory (trade creation versus trade diversion). Using in particular the experience of Hungary with relocations to illustrate its main point, it concludes that investment creation in Europe is rather weak, and hence is not expected to contribute to the EU's declared ambition to become the most competitive economy in the world. Moreover, the political turmoil of some new EU member countries in 2006 (in particular Hungary) indicates that a lack of effective restructuring in the expanded EU can cause dissatisfaction in countries expected to catch up with the EU-15 in a short period of time but not having the full possibilities to gain the productive capacities to do that.