Brain Drain with FDI Gain? Factor Mobility between Eastern and Western Europe

A growing strand of literature highlights that skilled migration may favour growth-enhancing technology transfer, trade and foreign direct investments between the source and the host economies of migrants (network effects). We explore a specific channel through which the possible \"diaspora externality\" associated with the current emigration of both poorly and highly educated workers may occur: the removal of informational, cultural and reputational barriers that could prevent firms of high-income countries from investing in the low-income immigrants’ economies of origin. By means of a straightforward gravity specification, we take a fragmentation and multinational production model in the fashion of Venables (1999) to the data. The focus is on the mobility of capital and workers between the advanced European Union countries (EU15) and New Member States (NMS) in the 1994-2005 period. The evidence points to a significant correlation between the volume of EU15’s activities in NMS and the total stock of NMS’ own-migrants in the EU15 economies. Furthermore, the larger is the share of skilled workers in the total emigration stock the larger is the inward FDI flow.