Alena Dorakh

• This thesis examines how Europe sustains its leadership and competitiveness as a global center for foreign direct investment (FDI) and trade between 1991 and 2023. While EU membership historically functioned as the dominant determinant of inward FDI and trade integration, its relative influence has declined as new structural factors, based on trade dynamics and export-platform strategies, have emerged, together with the growing presence of Asian, especially Chinese, investors establishing production hubs in Central and Eastern Europe to serve the wider EU market. Lower trade costs within Europe have reinforced this shift, leading EU investors to focus on vertical FDI, while non-EU investors to adopt export-platform FDI patterns. Chinese investment has moved from infrastructure-focused projects to strategic-sector FDI, highlighting Europe’s exposure to evolving global industrial and geopolitical dynamics. Chapter 2 examines how traditional determinants of FDI, including EU membership, interact with emerging drivers, such as trade interdependence, export-platform strategies, and Asian influence, to shape investment patterns in Europe. It employs a gravity-based empirical framework augmented with newly developed indicators, comprising the Bilateral Trade Interdependence Index, the Export-Platform Indicator, and Belt and Road Initiative (BRI) participation, together with a functional integration approach, covering over 95% of European countries and their global partners from 2010 to 2023. The findings indicate that trade dependency with non-EU partners grew most rapidly, increasing by 55% between 2011 and 2023. Stronger bilateral trade interdependence is found to significantly predict higher FDI inflows. The BRI analysis and functional classification indicate a shift from infrastructure-focused Chinese investment to strategic sectors, including electric vehicles and semiconductors. Since 2018, export-platform strategies have expanded from Europe’s core economies into Central and Eastern Europe, forming emerging production hubs, and have subsequently moved toward the Western Balkans and Turkey, likely reflecting evolving EU regulations and broader supply-chain realignments. Chapter 3 expands the FDI analysis to cover a longer timeframe, from 1991 to 2017, focusing on the period when EU membership exerted a strong influence on FDI in Europe, transforming member countries from primarily cost-attractive destinations into global investment centers. Using an augmented gravity model covering 39 host and origin countries, the analysis finds that EU membership increased FDI inflows by 23%, with investments from core EU members expanding into new EU member states, while FDI from non-EU countries decreased. At the same time, EU membership may also be driven by trade, and EEA participation reflects non-FDI motivations. The chapter also highlights that EU accession strengthens both market-seeking (horizontal) and x efficiency-seeking (vertical) FDI motives and applies methods to address negative and zero FDI values issues, ensuring robust estimation. The inclusion of lagged and lead variables shows that the EU integration process is phased over time, affecting FDI inflows with lags of up to 10–15 years after accession. Chapter 4 expands the range of FDI determinants by deriving trade cost indices as a proxy for connectivity and extending the geographic scope of the analysis. In addition to EU members, the sample includes the Western Balkans, Turkey, and new EU candidates and applicants (Moldova, Ukraine, and Georgia) over the period 2000 to 2020, covering approximately 80% of European FDI flows. Trade costs are calculated for each country in the sample with its trade partners, not only within and between European subregions but also with non-EU partners such as China, and are combined with measures of FDI restrictiveness. The results show that China remains among the EU’s top three trading partners in goods and that trade costs significantly influence FDI inflows in Europe. The analysis also highlights that declining trade costs between European countries have reduced market-seeking (horizontal) FDI, while non-European investors, especially China, increasingly pursue export-platform FDI to serve third-country markets. A sharp reduction in trade costs between the Western Balkans and the EU (-45%) and a smaller decline with China (-35%) illustrates how regional integration reduces the need for local horizontal FDI while reinforcing Europe’s role as a hub for global production. Chapter 5 shows that despite concerns about increasing outside influence, developed European countries remain the dominant source of FDI in the region. The chapter focuses on China’s role, examining FDI patterns across advanced EU members, new member states, and Western Balkan economies between 2000 and 2019, while distinguishing the effects of EU integration and BRI participation on FDI. Chinese influence has expanded primarily through the Belt and Road Initiative, particularly in accession and neighboring countries. Although BRI participation does not significantly increase FDI on its own, reflecting the dominant part of loan-financed infrastructure rather than private investment, it has strengthened physical and digital connectivity, laying the groundwork for future, longer-term FDI. The analysis also shows that intra-EU trade costs declined significantly after the 2004 and 2007 enlargements, while trade costs between the Western Balkans and China have fallen steadily since the launch of the BRI in 2013. As a result, Chinese influence is more pronounced in new EU member states and Western Balkan economies than in Western Europe. Over time, enhanced connectivity and supply-chain integration may support more diversified FDI inflows.