Continental Drift: European Integration and the Location of UK Foreign Direct Investment

This paper seeks to quantify the impact of the European Internal Market programme on the sectoral and geographical pattern of foreign direct investment by UK corporations. We use an annual panel data set covering investment within seven sectors in the European Union and the US, and control for market size, relative costs, innovation, corporate financial constraints and sector-specific fixed effects. Our results indicate that the programme has had a significant positive effect on the level of investment, both in industrial and service sectors. There is also some evidence of investment diversion from the US into the EU since 1990.