Explaining Japanese direct investment flows into an enlarged Europe: A comparison of gravity and economic potential approaches

This study employs the gravity and economic potential frameworks to explain Japanese direct investment flows into EU and EU candidate countries between 1990-2000. Our empirical results suggest that, when allowing for individual country heterogeneity, Japanese firms locate in countries with high economic potential suggesting that the economic potential framework is more general than the gravity model and is the preferred framework under which these investment flows should be analyzed. Furthermore, for Central and Eastern European countries, their entry into the EU has already been taken into account by Japanese investors, and that these countries should not expect increased FDI inflows when entry actually occurs. (C) 2003 Elsevier Inc. All rights reserved.