THE EU EASTERN ENLARGEMENT AND FDI: THE IMPLICATIONS FROM A NEOCLASSICAL GROWTH MODEL

This paper studies how the EU Eastern enlargement can affect the economies of the old and the new EU members and the non-acceded countries in the context of a multi-country neoclassical growth model where Foreign Direct Investment (FDI) is subject to border costs. We assume that in the moment of the EU enlargement border costs are eliminated between the old and the new EU member states but they remain unchanged between the old EU member states and the nonacceded countries. In a calibrated version of the model, the short-run effects of the EU enlargement proved to be relatively small for all the economies considered. The long-run effects are however significant: in the acceded countries, investors from the old EU member states become permanent owners of about 3/4 of capital, while in the nonacceded countries, they are forced out of business by local producers.Foreign direct investment; EU enlargement; Neoclassical growth model; Transition economies; Three-country model