REGIONAL COOPERATION AND ECONOMIC INTEGRATION

Along with the variables described above, we include the agglomeration effect. Various
empirical studies present evidence on the presence and importance of the self-reinforcing
effect of foreign investment. Agglomeration economies emerge when there are some
positive externalities by collocating near other economic units due to the presence of
knowledge spillovers, specialized labour markets and supplier network. Once agglomeration
economies set in, there will be a snow balling effect of FDI inflows in successful countries
(Kinoshita, Y. and Campos, N.F., 2002)
The experiences of the earlier EU enlargements demonstrate that economic integration
can contribute significantly to an increase of FDI inflows (Zakharov, V. and Kusic, S.
2003).In our model we add a dummy variable-EU accession negotiations which serves as a
proxy for the EU accession effect on FDI. We hypothesize that the EU candidate countries
with started formal EU accession negotiations will attract more FDI than those countries
that have only candidate status.
3. Econometric models and results
FDI FLOWS IN SOUTH EASTERN EUROPE
The objective of this section is to specify an econometric model for estimating the impact
of investment climate and the EU accession on the growth of FDI in the EU candidate
countries.
One possible approach is to estimate a gravity model. This model has proved very successful
in estimating trade flows and has been used by some authors for estimation of the effect
of EU integration on FDI flows (Brenton et.al, 1999 and Egger, P. and Pfaffermayr, M.,
2004).
To test the impact of the EU accession on FDI stock per capita in the EU candidate countries,
it is important that we control for the other determinants of FDI. Based on a sample of 27
observations (9 years x 3 countries), we employ the following five model specifications,
where model (1) is our benchmark model:
whereas:
t -a particular year (t=1,2,...9) in the period 1999-2007;
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