16.1 Introduction

This chapter assesses the likely effect of EU membership by the Central and East European (CEE) countries on the corporate strategies of direct investors. However, given the complexity and diversity of the motives that underlie FDI there can be no simple answers.

Most legal barriers to trade and investment have already been removed by the Europe Agreements, along with the gradual removal of tariff barriers during the accession process. EU membership is the natural continuation of the process of integration that is already taking place. The existing patterns and trends of integration are likely to deepen and eventually change the industrial landscape of Europe. In most industries membership is unlikely to trigger fundamental changes in the pattern of integration, though it may accelerate processes already under way. However the business environment for investors in CEE may improve for two reasons:

• EU membership implies the deeper integration and harmonization of institutional structures, which will lower the adjustment costs incurred by those operating across borders and thus stimulate new and stronger business cooperation.

• EU membership may lower country risks, and hence risk premia. Therefore more projects with moderate expected returns might be undertaken.

However in some industries EU enlargement will do more than accelerate existing processes. In these industries the regulatory regime established by the Europe Agreements falls short of the principle of free movement of capital and goods among EU members :

• The pre-accession international trade agreements, including the Europe agreements, have a number of industry-specific regulations that fall short of the ideal of free trade. Their liberalization will have a profound impact on the industries concerned , particularly traditional industries such as agricultural products, textiles , and coal and steel (World Bank, 1999).

• The postsocialist liberalization and privatization efforts in CEE have created regulatory regimes for some industries that do not conform to the ideal of free capital flows and will have to be adjusted (European Commission, 2001a). Thus industries such as utilities and telecommunications can be expected to see increased FDI in the near future.

These changes will affect corporate strategies and consequently the location of industry in Europe. In this chapter we consider various types of investor and how they might react to the CEE countries membership of the EU. Based on current bilateral trade between Germany and Poland, we also consider how membership will affect investors strategies for specific industries. The picture developed is complicated as different operations in CEE play different parts in investors global strategies.

Section 16.2 briefly illustrates the impact of accession using data for countries that joined the EC in the 1980s. Sections 16.3 to 16.5 establish a typology of FDI, briefly review the international economics literature on the relationship between international trade and FDI, and relate recent research on institutional development and corporate strategies in emerging markets to the transition context. Based on the available industry-specific data, Section 16.6 reviews FDI in Poland and assesses the impact of EU enlargement on German FDI in selected industries. Finally, Section 16.7 brings together some of the theoretical and empirical arguments developed in the chapter.