More Integrated but Also More Divided: Intended and Unintended Consequences of Foreign Direct Investment and the Cohesion Policy in Eastern Europe

Medve-Bálint, Gergő and Bohle, Dorothee (2016) More Integrated but Also More Divided: Intended and Unintended Consequences of Foreign Direct Investment and the Cohesion Policy in Eastern Europe. MAXCAP Working Paper Series (34). Freie Universität Berlin, Berlin.

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Abstract

By examining the intended and unintended consequences of Foreign Direct Investment (FDI) inflows and Cohesion Policy, this paper offers a critical assessment of the EU’s economic integration capacity in the Eastern European member states. We argue that although both foreign investments and EU funds have contributed to overall economic growth and facilitated integration to the core European and global markets, they also had divisive consequences in economic and spatial terms. First, we show that FDI, which the EU has actively promoted in Eastern Europe, has produced dual economies in which some privileged, FDI based, competitive sectors thrive along with less prosperous, domestically-owned ones. Moreover, FDI has also been the main driver of rising territorial disparities because the bulk of foreign investments have been realized in the most developed regions. Second, we demonstrate that although the funds of the Cohesion Policy have enhanced economic growth, they have failed to deliver on their original goal of reducing territorial inequality. This is because – similar to FDI – EU funds tend to accumulate in the wealthiest Eastern regions. We argue that this is partly the consequence of the recent shift in the Cohesion Policy which has been captured by the economic governance agenda of the EU: instead of supporting the backward regions, the policy now aims to promote growth and competitiveness everywhere with less emphasis on cohesion. We conclude that European integration in general and FDI and Cohesion Policy in particular have produced externally more integrated but internally more divided economies in Eastern Europe.

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