The interplay between foreign direct investment, security and European integration by comparing Poland and Romania

This work investigates the factors that have led to Poland and Romania's different evolutionary paths during the process of accession to the EU, placing an emphasis on security concerns, foreign direct investment and the interplay between the two. We identify two sets of determinants of the accession process, one in the political sphere and one in the economic sphere. Each set of determinants, be it in the political or economic sphere, has the potential to constitute a vicious or a virtuous circle which includes the prospect of EU membership itself. Furthermore, each of these circles is self reinforcing and can reinforce the corresponding circle in the other sphere. Finally, political and economic elements of the circles considered here can constitute security concerns for each of the countries analysed, while FDI represents a main element of the economic circle. We find that until 1996 Romania has been trapped in a combination of two vicious circles in both the political and economic spheres, while Poland has benefited from a combination of two virtuous circles since 1993. We test the hypothesis that, by changing perceptions of security and enhancing FDI, the prospect of EU membership can break the vicious economic circle of high perceptions of insecurity, low FDI, slow reforms, poor prospects for EU integration and hence high perceptions of insecurity in which Romania has been trapped. This is achieved firstly by a qualitative comparative analysis between Poland and Romania with regard to the determinants of FDI and the nature of their security concerns. Secondly, an econometric model assesses the determinants of FDI in ten transition countries candidates for EU membership and in particular the role of security and European integration variables. Our results support the hypothesis that, by creating positive perceptions of security of the candidate countries (especially of poor reformers), the prospect of EU membership may enhance FDI, thus speeding up economic reforms, leading to full membership of the Union and hence positive perceptions of security.It also appears that the prospect of EU membership can lead to a virtuous circle in the economic sphere through providing motivation for economic reforms and through financial aid and its impact on foreign direct investment and economic reforms.