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Economic integration and specialization in production in the EU27: does FDI influence countries’ specialization?

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Abstract

The objective of this article is twofold. Firstly, we proceed to an analysis of the evolution of specialization in production in the enlarged EU, taking into account all its 27 member countries. Given their decomposability properties, we use the entropy-based indices to measure countries’ relative specialization and then, given our rather short period of analysis, we use the bootstrap method to analyze the evolution of the specialization index. We first analyze all economic sectors and then, our analysis is more detailed focusing on manufacturing industries. Globally, we find that specialization is decreasing across all economic sectors, while it is increasing across manufacturing industries. Secondly, we study specialization determinants, with a special interest in the impact of foreign direct investment (FDI). For homogeneity reasons, we analyze two separate samples, one including old EU members plus Cyprus and Malta and the other, the CEECs. In order to take into account the endogeneity of most of our independent variables, we use the vector autoregression (VAR) technique and analyse the impulse response functions. Globally, FDIs seem to positively influence countries’ relative specialization, for our both samples and for both economic sectors and manufacturing industries. However, their impact appears weaker than most of the other independent variables, such as the market potential or the relative endowments.

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Notes

  1. The bootstrap is a method for making probabilistic statements about population parameters based on a data sample drawn randomly from that population. Thus, the sampling distribution of an inequality index is estimated by multiple random resampling with replacement from the data set at hand. Furthermore, Biewen (2001) proved that the bootstrap test for inequality changes over time is consistent for entropy-based indices. In our study, all bootstrap results are based on 10,000 replications.

  2. We let interested readers refer to Brülhart and Traeger (2005) for a detailed discussion and presentation of the mathematical details regarding both relative and absolute indices.

  3. The CEECs are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. We refer to EU17 as Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Spain, Sweden, United Kingdom.

  4. We refer to sectoral employment given that our specialization indices have been calculated based on such statistics.

  5. These conclusions are based on authors’ calculations using FDI stocks from the OECD database online and employment from the Groningen database.

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Authors and Affiliations

  1. CATT (Centre d’Analyse Théorique et Traitement des données économiques), Université de Pau et des Pays de l’Adour, Domaine universitaire, Avenue du Doyen Poplawski, BP 1633, 64016 , PAU Cedex, France

    Natalia Vechiu & Farid Makhlouf

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  1. Natalia Vechiu
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  2. Farid Makhlouf
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Correspondence to Natalia Vechiu.

Appendix

Appendix

See Tables 4 and 5.

Table 5 The determinants of specialization across manufacturing industries in the CEECs
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Vechiu, N., Makhlouf, F. Economic integration and specialization in production in the EU27: does FDI influence countries’ specialization?. Empir Econ 46, 543–572 (2014). https://doi.org/10.1007/s00181-013-0682-9

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