This chapter assesses the effects of "Eastern" EU-enlargement on the race for FDI and the policy implications. We start from the proposition that the evolving production patterns of incumbent and new member states determine the need for and the justification of location policy (LP) and FDI promotion policy (FDI-PP). On the basis of empirical production patterns, it is argued that while the specialisation outcome dominates in the short run, the convergence scenario is more likely to prevail in the medium term. Therefore, old and new EU-members will compete increasingly for the same type of FDI. How EU-enlargement per se affects the spatial distribution of inward FDI is described next. The role of FDI-PPs and LPs in an enlarged EU are discussed on the basis of the convergence outcome. Since the new economics of location competition and of FDI-promotion cast serious doubt on the economic justification and effectiveness of FDI-PP, the chapter concludes with a basic dilemma in the race for FDI: namely, the greater ineffectiveness of FDI incentives in the Single Market and fewer possibilities for differentiation of LPs. The latter is due to harmonisation pressures, which calls for innovative policy strategies by central and regional authorities. / Series: Department of Economics Working Paper Series

This paper reviews and summarises the results of selected studies on performance gaps between multinational enterprises and their domestic counterparts. Performance gaps arise in such fields as productivity, technology, profitability, wages, skills and growth. While these gaps are often attributed to foreign ownership of the affiliates, the theory of the Multinational Enterprise argues that these gaps are due to being a Multinational rather than the nationality of the firm. Empirical evidence on the existence of performance gaps between foreign and domestic firms is supportive of this view: foreign ownership turns out to be a much less important explanatory factor than normally assumed. Firm-specific assets and firm characteristics like industry, size, parent country and multinationality per se are more important. Such results are broadly consistent with those derived in the literatures on ownership change, on foreign entry and on spillovers. We conclude that there is little case for foreign direct investment promotion policies to discriminate between firms on the basis of ownership. / Series: Department of Economics Working Paper Series