Assessing the relationship between trade agreements and foreign direct investment
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Thesis (M.P.P.)--Georgetown University, 2009.; Includes bibliographical
references. This paper analyzes the relationship between preferential trade agreements (PTAs)
signed between countries and the foreign direct investment (FDI) inflows to the member
countries of the agreements. Using the most comprehensive database of PTAs available, it
extends earlier research by considering the relationship between FDI flows and different types
of bilateral and multilateral trade agreements, by controlling more carefully for political
institutions, and by analyzing FDI flows between pairs of countries rather than FDI receipts.
FDI has grown in importance to economies across the globe and establishing a link between PTAs
and FDI would provide policymakers with another avenue to promote FDI inflows to their
countries. This study demonstrates that institutional variables play a role in the
relationship between trade agreements and FDI, and that relationship also differs depending on
the type of trade agreement--for example, entering a customs union with an OECD country has a
very different relationship with FDI than joining the WTO.Keywords:
Customs union
Globe
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International Trade and Foreign Direct Investment (FDI) have grown at fast paces during the last decades. At this point, however, it is not clear whether trade and investment are regarded by firms as complementary ways of accessing other markets, or, instead, if they are employed as alternative strategies. This paper examines this issue empirically, for the particular case of Europe, an area in which commercial and economic integration has gained remarkable momentum since 1992. More specifically, it tests whether the reduction of trade barriers over time among the members of the European Union (EU) has increased not only trade flows but also FDI within those countries. A gravity model is estimated using the Hausman-Taylor estimation technique—to circumvent time invariability and endogeneity—for intra Europe FDI and, separately, for FDI to the EU members with origin in third countries. In addition to trade integration measures, this paper also analyzes the potential role of other traditional determinants of FDI, as the market size of the host country and the cost differential among home-host economies. The results suggest that EU commercial integration and FDI reinforce each other, thus being complements rather than substitutes in Europe. This effect is apparent for the intra-EU FDI and also for investment coming from countries outside the EU. Cost differentials are not as relevant as the possibility of gaining market share which leads us to conclude that in the EU the FDI pattern follows a horizontal strategy rather than a FDI vertical model.
Endogeneity
Single market
Investment
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This document explores the determinants of foreign direct investment. In particular, it considers the effect that the preferential trade agreements have had over FDI flows in Latin America, after controlling for a series of structural, institutional, political and infrastructure variables. The paper gives special attention to the impact of preferential trade agreements on diverting and creating FDI. A panel data analysis is undertaken using a gravity model with FDI data from OECD and ECLAC covering the 1980-1998 period.
Regional Integration
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The main objective of this study is to investigate the relationship between foreign direct investment (FDI) and trade and further to examine the impact of FDI on trade from the evidence of China. Some earlier theoretical work has predicted either a substitute or complementary relationship between FDI and trade yet some empirical studies have revealed a positive relationship between FDI and trade. In this study, using the recent FDI and trade data of China, we find that FDI has a positive impact both on China's provincial trade and on China's bilateral trade. It argues that given the overwhelming dominance of developing source countries and their labour-intensive investment pattern in China, FDI is mainly export-oriented and, therefore, has a positive impact on promoting China's international trade. JEL: F14, F21, C12
Dominance (genetics)
Empirical Research
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The study estimates the impact of bilateral investment agreements (BITs) on FDI inflows into fifteen Asian developing countries for the period 1980-81 to 1999- 2000 and examines whether signing an investment agreement with a developed country or a developing country matters. It also examines the impact of regional investment agreements, namely between APEC and ASEAN countries on FDI inflows. Panel data estimations are undertaken and the results show that signing BITs attracts FDI inflows. However, it is BITs with developed countries that increase FDI inflows as compared to BITs with developing countries. Results indicate that investment agreement between APEC countries has increased FDI inflows but that amongst ASEAN countries has had no impact.
Investment
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In the traditional trade model, FDI and trade were substituting each other because the major objectives of the traditional model were finished goods. However, the introduction of intra-firm trade goods by multinational enterprises (MNEs), and the process of the international economic integration expanded the trade model to embrace the possibility of complementarities between FDI and trade. Accordingly, this study tries to find out the relationships between FDI and trade in the past decades by comparing the FDI and trade records of Japanese and MNEs of the United States.
Deep integration
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Using panel data for the period 1970-97, I examine the relation between a developing country's trade openness and the stock of its FDI liabilities. The paper makes two contributions. First, I find that trade openness is positively correlated with FDI liabilities, with or without country fixed effects. Moreover, this correlation remains robust to the inclusion of additional variables on the right hand side, such as GDP per capita, inflation, institutional quality, macroeconomic volatility and measures of capital controls. Secondly, I show that the source of this correlation is causality from FDI to trade openness, rather than the other way around. To establish this, I run IV regressions first with FDI as the dependent variable, and trade liberalization dates instrumenting for trade openness, and then with trade openness as the dependent variable, and bilateral investment treaties signed by countries instrumenting for FDI. I find that trade liberalization increases trade openness, but predicted trade openness has no explanatory power for FDI liabilities. On the other hand, the number of bilateral investment treaties signed by a country significantly increases its stock of FDI liabilities, and the predicted stock of FDI liabilities has significant explanatory power for trade openness. This is an important finding because the standard approach so far in the literature has been to include trade openness on the right hand side of regressions (with the left hand side involving some measure of FDI liabilities), thereby implicitly assigning to it a causal role. My paper shows that this practice introduces endogeneity bias in the regression coefficients.
Openness to experience
Explanatory power
Endogeneity
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With regarding to multinational corporations,this paper discussed the relation between FDI and international trade under changes of costs.It is shown that the relation between FDI and international trade is either complementary or substitutable,which depends on the trade cost.Based on the situation of China,policy suggestions were presented on how to attract investment from foreign country.
Investment
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This paper investigates the effect of trade agreements on the transnational corporation presence in the developing Asia. This hypothesis is tested on the sample of 9 Asian developing countries for twenty-one years’ time. Evidence is found that the Trade agreements had a significant impact on the FDI received by these Asian countries. Along with trade agreements other conventional FDI location pull factors also play a significant role in the attraction of FDI to the specific region. Through fixed effects panel estimation method, it is found that countries with large market size, educated labour and the low trade barriers are important aspects, which MNC’s consider while making investment in this region.
Corporation
Sample (material)
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The opening up and reform policy,together with the international industry transmission in 1980 s brought FDI opportunities to developing countries and China,seizing such chance,became the largest destination of FDI in the world. After 30 years' development,China's enterprises embark on the investment opportunities overseas. The influences of FDI on the trade of the country involved have been a heated issue in academia. This paper is based on the statistics of Sino- U. S. bilateral FDI and trade between 1984 and 2012 and adopts the cointegration model as the approach for econometrics and whereupon finds out the conclusion:FDI from China to U. S. will increase the import from U. S.,and vice versa.
Investment
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This research work evaluates the proposition that trade liberalisation is instrumental in pulling FDI inflows to emerging economies.Using panel random effects model on annual data of 6 emerging countries including Brazil, China, India, Mexico, Russian Federation and Turkey from 1996 to 2014, it is found that liberalisation of trade and investment regime measured by trade agreements significantly affect the multinationals' overseas investment decision.Market size, development level and human capital, considered essential by foreign investors, also have a significant positive effect on incoming FDI.Preferential and regional trade agreements increase the openness of a country's economic and investment borders.They reduce duties, taxes, tariffs as well as the inflexibility in regime policies vis-à-vis foreign firm operations.This usually ensue trade and investment liberalisation and consequentially has a positive impact on FDI inflows to these nations.Among trade agreements only the preferential trade agreement is found to be significantly positive.It is plausible given the fact that except for Mexico all other countries selected are far away from the major FDI source nations.
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