The Economic Impact of the European Integration on the Netherlands. A Quantitative Analysis of Foreign Trade and Foreign Direct Investments

Abstract

The main objective and motivation of this thesis is to provide the reader with a quantitative analysis focusing on the impact of the European Integration on the Netherlands exclusively. To this end, two major and one minor research questions are addressed. The first main question focuses on the impact that European Integration has on the Dutch foreign trade. The thesis applies a dynamic panel analysis, to measure the effect of the European Economic Community and the European Union on the foreign trade of the Netherlands in the 1961-2000 period. The results indicate that the integration had a significant impact on the exports, but imports seem to be just temporary affected. A possible explanation is the relatively liberal pre-integration trade policy of the Netherlands, and the large share of re-exports, which significantly influence the trade patterns. The second main objective is the analysis of Foreign Direct Investments between 1984 and 2002. The Granger causality tests indicate a two-way relationship between trade and investment: trade has a positive impact on investments, serving as a market-signal, while investments seem to negatively Granger-cause trade, suggesting a substitution relationship. Based on the Knowlegde-Capital Model of Markusen, a dynamic panel model is estimated on the Dutch in- and outward FDI. Quite surprisingly, the results do not seem to support that relative skill endowment would play an important role in the investment decisions. However, the competitive position of the Netherlands proves to a significant factor in case of outward FDI. The minor research objective is the analysis of long-run relationship between the openness and the economic growth in Netherlands. The applied VAR analysis suggests openness having significant positive impact on economic growth between 1950 and 2000. This impact is temporary though and does not lead to a permanent growth effect. With the steady increase of openness in the last five decades, this thesis estimates that the growing openness contributed to the Dutch economic growth by one percent on average annually.