EU Enlargement and Inward FDI in Central Europe

Economic forecasts for the new European Union (EU) member countries have generally remained positive following their entry into the EU (Haba, 2004). For example, the Vienna Institute of Comparative Economic Studies (WIIW) has maintained a positive outlook on their economic growth arguing that the GDP growth rate would be consistently between 4 and 9 per cent per annum. A major factor that defines such forecasts is the expectation that foreign direct investment (FDI) to the Central and East European region as a whole will increase. The WIIW expected the total amount of FDI inflow into the eight new EU member countries to reach €15.4 billion in 2004, which was 51 per cent more than in 2003. Thus the entry of the Central and East European countries into the EU has been the major driver for their improved macroeconomic performance and for the substantial rise in FDI inflows (UNCTAD, 2005). This chapter investigates the EU enlargement as a fundamental factor promoting capital inflow into Central Europe using an evolutionary game approach.