The Motives for the FDI Location Choice in the 'Old' and 'New' Europe

This paper adds to the scarce cross-country evidence on FDI location decisions between the EU-15 Member States and the ten new Members that joined the European Union (EU) in 2004 and 2007 from the Central and East European Countries (CEECs). To capture the discrete nature of the location choice, a conditional logit methodology is used to analyze the determinants of FDI location decisions across these EU-25 countries. The study uses the European Investment Monitor database, which contains information on the location of over 35,000 individual cross-border investment projects that were implemented in the EU between 1997 and 2010. The purpose is to understand the factors an investing firm considers when choosing a location within the EU-25, and to understand the effect of the European Union accession process on the amount and nature of this investment. A distinction is made between market-based and resource-based factors, while macroeconomic, industry and institutional variables are included to control for other country-level factors that affect FDI location. Overall, allowing for heterogeneity in preferences of investors locating in the ‘old' versus the ‘new' EU Member States, the results show that FDI tends to avoid congested locations in the EU-15 by locating in the periphery away from main markets, but this tendency is not evident for the CEECs. Investment in the EU-15 is predominantly knowledge-seeking, as better educated workforce attracts FDI, whereas in the CEECs the efficiency-seeking motive dominates, as greater education attainment and higher labour costs both deter FDI. An analysis by industrial sector indicates that these factors apply to manufacturing FDI, but that a better educated workforce is actually more attractive for service FDI in the CEECs, indicating that the knowledge-seeking motive may be more important for FDI in the CEECs in future. The estimates on the controls are plausible and they indicate that EU membership increased the flow of FDI to the CEECs. The results show that membership changed the importance of the market-based and resource-based motives for FDI location in the CEECs.