REGIONAL COOPERATION AND ECONOMIC INTEGRATION

EU candidate countries (Croatia, Macedonia and Turkey) in the period 1999-2007 using a
gravity model. We have tested the significance of a number of determinants of FDI to the
EU candidate countries: classical determinants (market size, labour costs, quality of labour
force, infrastructure and transaction costs), policy variables (macroeconomic stability and
external liberalization), non-economic factors (governance), agglomeration effect and the
EU accession effect. We have found out that agglomeration economies and the achieved
progress in the EU accession process are the key determinants of foreign direct investment
from the EU member states to the EU candidate countries. Also important is the governance,
proxied by the Euromoney country ranking.
Our findings suggest a need for concentrated policy efforts between the EU and the EU
candidate countries furthest behind in the EU accession process (Macedonia) to speed-up
the start of the formal EU negotiations. In this regard, Macedonia’s government should
accelerate the harmonization of its laws with the EU laws as a basis for formal start of
negotiations and should further improve the general investment environment. The other
party in the negotiations, the EU can also encourage more FDI flows to Macedonia by
more rigorous analysis and objective assessment of the progress achieved, allowing greater
flexibility in sequencing of reforms and accession tasks and extending additional financial
aid and political support to Macedonia (Bevan et.al., 2001). Failure to do that, could
deteriorate further Macedonia’s position in the EU integration process and may cause a
vicious circle where the stagnation in the EU enlargement process decreases FDI inflows to
Macedonia and slows down economic reforms and as a consequence negatively influences
future progress of the country on the way to EU integration.
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