Contrasting Effects of EU and EMU Membership on FDI : A Synthetic Difference‐in‐Differences Approach

ABSTRACT We examine the effects of European integration on inward foreign direct investment (FDI) by disentangling the impacts of EU membership and euro adoption. Focusing on the 10 countries that joined the EU in 2004, we exploit the heterogeneous integration process in which seven countries subsequently adopted the euro while three retained independent currencies. Using the synthetic difference‐in‐differences estimator and Japanese firm‐level data, we find that EU membership increased the FDI probability by 3.64% for non‐EMU countries, while reducing it by 0.43% for EMU entrants. Euro adoption itself significantly lowered the FDI probability, a result also confirmed by complementary country‐level analysis. Consistent with our theoretical model, these effects are primarily driven by the manufacturing sector, where exchange rate flexibility serves as an operational hedge for export platforms. Overall, our findings highlight a fundamental trade‐off between market access and monetary integration.