Being outside the European Union has actually encouraged foreign direct investment in a number of non-member countries so is the single market really the huge economic advantage it is cracked up to be?
The popular idea that international investors are attracted by the prospect of investing in European Union because it is 'the world's largest single market' takes a knock when foreign direct investment flows and stocks recorded by the United Nations Conference and Trade and Development - over the 41 years from 1970 to 2010 - are analysed. We can start by comparing the inflow and stocks of FDI in 11 EU countries, who have been members since start of the single market in 1993 - -having to omit Luxembourg, which did not declare its FDI receipts to UNCTAD until 2002 - with those of the three European countries which are not members of the union: Switzerland, Norway and Iceland. In 2010, the weighted averages of the inflows to the two groups were virtually the same -$618 and $616 per capita.
Annual inflows are, however, notoriously volatile and the performance of the two groups over the years is best compared by the accumulated FDI stock held. By 2010, foreign investors had invested $14,683 per capita in every person in the 11 EU countries - but they had invested nearly four times as much, $56,009 per capita, in the three European countries that are not members of the EU. In a second comparison, adding five independent countries without large domestic markets - Australia, Canada, New Zealand, Israel and Singapore - to the three non-European countries, the EU 11 fared somewhat better. The weighted average of the FDI inflow in 2010, into these eight countries was $1,312 per capita. But more importantly, their stock was $28,017 - a little short of double that of the EU 11.
Individually, some of the smaller EU countries performed rather well. While Singapore was the top recipient of FDI stock in the 19 countries, with $92,378 per capita, and Switzerland was second with $69,990. They were followed by Belgium with $62,548, and Ireland with $55,280. However, the weighted average of the EU 11 as a whole was pulled down by the lower inflows over past years to the larger EU countries like the United Kingdom and France - and the still lower inflows to Germany, Italy and Spain.
The main conclusion is that the EU's single market had no discernible beneficial effect on the inflow of FDI. Contrary to expectations, there was no bounce in the amount of FDI to EU countries before and after 1993; when investors had the prospect of the entering the 'the world's largest single market'. And there is no evidence that the EU 11 have since been catching up with the independent countries. On the contrary, for most of the 21st century, they have been falling further behind. Nor is there any evidence of a convergence amongst members of the EU 11, as investors considered an investment in any one an investment in them all. The top EU recipients - Belgium, Netherlands and Ireland have remained at the top - while the historically poor performers - Portugal, Spain, Germany, Italy and Greece - have remained at the bottom, with the disparity between top and bottom increasing over the years 1993 to 2010.
There is no sign in this data that being outside the EU had any adverse effect on the inflow of FDI to any country. Apart from their larger the FDI stock per capita, inflows to the eight independent countries recovered after the financial crisis of 2008. Whereas those to the EU 11 continued to decline, even before the eurozone crisis erupted. The recovery so far of Iceland is striking, the best of all the 19 countries considered. While its inward flow plummeted from $22,322 per capita in 2007, to a mere $263 in 2009, the fall was short-lived. In 2010 it received $9,215 –the highest amount per capita of any of these 19 countries in that year. Some 12 times the per capita inflow to the UK and 16 times as much as went to Germany, and higher even than that of Singapore.
Another indication that non-membership of the EU does not a discourage FDI is that the major share of the foreign investment into Switzerland, Norway and Iceland came from European investors. These investors must have been reasonably well-informed of the merits or otherwise of 'the world's largest single market', but nonetheless preferred to invest outside the EU. Non-membership of the union could hardly, therefore, have been a negative factor. Indeed, on the basis of these figures one is forced to conclude that it has been an advantage, though there is no evidence about the reasons for investors' decisions, or the nature of their investments.Michael Burbage is a former lecturer at the London School of Economics. His report Does the European Union's single market encourage foreign direct investment into the United Kingdom? was produced for the Bruges Group campaign organisation