European Integration, FDI and the Internal Geography of Trade: Evidence from Western European Border Regions

In this paper we use a gravity model to study the trade performance of French and Spanish border regions relatively to non-border regions, over the past two decades. We find that, controlling for their size, proximity and location characteristics, border regions trade on average between 62% and 193% more with their neighbouring country than other regions, and twice as much if they are endowed with good cross border transport infrastructures. Despite European integration, however, this trade outperformance has fallen for the most peripheral regions within the EU. We show that this trend was linked in part to a shift in the propensity of foreign investors to move their affiliates from the regions near their home market to the regions bordering the EU core.