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The Location of Industrial Activities After EU Enlargement: A Sectoral Approach

The Location of Industrial Activities After EU Enlargement: A Sectoral Approach. By Laurent Ferrara and Alain Henriot Centre d’Observation Économique (COE) de la Chambre de Commerce et d’Industrie de Paris 2 nd Euroframe Conference on Economic Policy Issues in the European Union

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The Location of Industrial Activities After EU Enlargement: A Sectoral Approach

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  1. The Location of Industrial Activities After EU Enlargement: A Sectoral Approach By Laurent Ferrara and Alain Henriot Centre d’Observation Économique (COE) de la Chambre de Commerce et d’Industrie de Paris 2nd Euroframe Conference on Economic Policy Issues in the European Union Trade, FDI and relocation: challenges for employment and growth in the European Union?  Vienna, 3 June 2005

  2. The context • EU enlargement … • The end of the transition process … • … and the beginning of a new phase (a common legal framework for EU-25) • Relocation of industrial activities across EU members?

  3. The theoretical background • FDI exploit international differences in factor prices • FDI exploit firm specific assets • => • Vertical FDI: geographically separates the stages of production. The primary motivation is factor savings • Horizontal FDI: replicates activities at home and abroad. The primary motivation is access to markets

  4. The econometric model • A gravity model • Explaining the turnover of foreign affiliates: • « Measuring Globalisation »: a OECD database

  5. The econometric model • log(CAij) =  + j + 1 log(GDPi) + 2 log(GDPj) + 3 log(DISij) + • 4 (log(CSi) - log(CSj)) + 5 UEij + 6 LCij + ij , • log(CAij)is the logarithm of the firms turnover of country j in the host country i • log(GDPi) is the logarithm of the host country GDP (in current US dollars), • log(GDPj) is the logarithm of the investor country GDP(in current US dollars), • log(DISij)is the logarithm of the distance between the host and the investor countries, • log(CSi) and log(CSj)are respectively the wage costs in current dollars for the host and investor countries, • UEij is a dummy variable taking 1 when the two countries are EU25 members and zero otherwise, • LCij is a dummy variable taking 1 in the case of common language between host and investor.

  6. Results on manufacturing industries

  7. Results on manufacturing industries • Potential turnover: CA*=exp (log(CAij)) • Hungary

  8. Results on manufacturing industries • Potential and realised turnover : Poland

  9. Results on manufacturing industries • Turnover of German firms in various countries (potential* or realised) • (billions of US dollars) (1999, 2001 or 2002 - 2002 for potential)

  10. Sectoral results • Random effects on sectors

  11. Conclusion • FDI theory is validated : both market access variables and costs differential have a significant impact • New members will play a significant role as host countries • The sectoral distribution of FDI in those countries may be affected by the sector sensitivity at wage cost • Differentiation of industries in the European space? • Concentration of sectors characterised by scale economies • Clusterisation of high tech industries (but undetermined geographically • Growing specialisation of labour intensive sectors in low wage countries (among them NM)

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