2001) “Will Enlargement Threaten Ireland’s FDI Inflows?”, Quarterly Economic Commentary

One frequently encounters the view that eastwards enlargement of the EU will be in Ireland’s economic interest because it represents a substantial expansion of the market into which Ireland will be able to export freely. This perspective indeed provides the basis for most analyses of how the costs and benefits of enlargement will be shared across EU states. By failing to consider how enlargement may affect Ireland’s FDI inflows, however, this view ignores what is probably the most important dynamic in Ireland’s economic development.1 The conventional perspective is encapsulated in the work of Baldwin, Francois and Portes (1997) for example. Their analysis draws a distinction between two groups of industries. The first comprises sectors in which trade between the EU and CEEC (Central and Eastern European countries) is largely balanced at present. They argue that reciprocal liberalisation in these sectors will cause expansion in both regions because of the greater potential to exploit economies of scale. More dramatic changes are predicted for the second group of sectors, in which the EU has a strong surplus in its trade with the CEEC. Baldwin, Francois and Portes argue that CEE countries will be specialised out of these sectors, with consequent strong gains for the EU countries which currently export to the CEEC within these sectors. These sectors are (i) chemicals, rubber and plastic products, (ii) transport equipment, and (iii) capital goods. The EU country that stands to gain by far the most, given its size, sectoral composition and export orientation, is Germany, with France and the UK following at a distance. On the consumption side, the benefits of th