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North–South Integration and the Location of Foreign Direct Investment

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  • Ayça Tekin‐Koru
  • Andreas Waldkirch

Abstract

We investigate how North–South integration affects the location of foreign direct investment (FDI) between the two regions. The theoretical analysis suggests that integration affects the incentives of partner and nonpartner Northern countries to locate in the South differently and may lead to investment diversion from the Northern partner. We test our propositions using data from the North American Free Trade Agreement (NAFTA), the first major North–South integration scheme. We find that NAFTA partner FDI in Mexico has increased since the inception of NAFTA above what is implied by other determinants of FDI and the global upward trend during this time. Other countries have not increased their use of Mexico as an export platform. We also find no evidence that inward US FDI has been diverted. The results are robust to a number of different model and econometric specifications as well as the skill data used.

Suggested Citation

  • Ayça Tekin‐Koru & Andreas Waldkirch, 2010. "North–South Integration and the Location of Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 696-713, September.
    • Handle: RePEc:bla:reviec:v:18:y:2010:i:4:p:696-713
    DOI: 10.1111/j.1467-9396.2010.00908.x
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    Cited by:

    1. Ayça Tekin‐Koru & Andreas Waldkirch, 2010. "North–South Integration and the Location of Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 696-713, September.
    2. Waldkirch Andreas & Tekin-Koru Ayça, 2010. "North American Integration and Canadian Foreign Direct Investment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-40, August.
    3. Jaime DE MELO & Julie REGOLO, 2013. "Labor Markets in Regional Trade Agreements: What Do We Know ?," Working Papers P69, FERDI.
    4. Hiroshi Mukunoki & Hirofumi Okoshi, 2021. "Tariff elimination versus tax avoidance: free trade agreements and transfer pricing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1188-1210, October.
    5. Tekin-Koru, Ayça, 2012. "Asymmetric effects of trade costs on entry modes: Firm level evidence," European Economic Review, Elsevier, vol. 56(2), pages 277-294.
    6. Julia Kubny & Florian Mölders & Peter Nunnenkamp, 2011. "Regional Integration and FDI in Emerging Markets," Chapters, in: Ulrich Volz (ed.), Regional Integration, Economic Development and Global Governance, chapter 8, Edward Elgar Publishing.
    7. Shawn ARITA & TANAKA Kiyoyasu, 2013. "Regional Investment Liberalization and FDI," Discussion papers 13088, Research Institute of Economy, Trade and Industry (RIETI).
    8. Jie Ma, 2013. "Market Size, Local Sourcing and Policy Competition for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 984-995, November.
    9. Paola Cardamone & Margherita Scoppola, 2015. "The pattern of EU FDI in the manufacturing industry: What role do third country effects and trade policies play?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 54(2), pages 511-532, March.
    10. Tanaka, Kiyoyasu & Arita, Shawn, 2016. "The impact of regional investment liberalization on foreign direct investment: A firm-level simulation assessment," Japan and the World Economy, Elsevier, vol. 37, pages 17-26.

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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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