Inward and Outward Foreign Direct Investment: The case of the EU

Abstract

This study documents the sectoral pattern of inward and outward FDI in the EU. The empirical findings show that intra EU15 FDI stocks (inward and/or outward) grew faster than Extra EU15 stocks in all industries except transport equipment from 1995-2005 indicating that FDI has become a key element of the EU integration process. EU-Industries also differ greatly in their degree of internalisation measured as the FDI inward and outward stock. Financial services, mining and quarrying, chemicals and transport equipment have the highest stock of FDI as a percentage of value added. However, FDI stocks tend to overestimate the degree of internalisation of production since FDI is much less employment intensive in financialintermediation. Foreign affiliate data for the EU15 suggest that a significant proportion of domestic production is now accounted for by foreign owned firms, in particular in transport equipment, chemicals, and electronics. Furthermore, the ranking of FDI intensity across industries in the EU15 is rather similar in the US and in the new EU member states. Regression results suggest that industry effects are much more important than host and home country effects in determining the ratio of FDI stock as a percentage of value added across industries at the cross-section level.