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Analyzing the effects of the Regional Comprehensive Economic Partnership on FDI in a CGE framework with firm heterogeneity

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  • Li, Qiaomin
  • Scollay, Robert
  • Gilbert, John

Abstract

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) that is currently under negotiation among China and 15 other Asian countries. It is one of several potential mega-regional FTAs in the Asia-Pacific region. In this paper we investigate the potential effect of RCEP on foreign direct investment (FDI) with a focus on China using an innovative computable general equilibrium (CGE) model. The model is built on the theory of firm heterogeneity extended to FDI. The framework is able to capture FDI increases along both the intensive and extensive margins. Liberalization under RCEP is simulated as impacting on FDI both directly through FDI liberalization and indirectly through trade liberalization. Our simulation results suggest that RCEP would encourage significant increases in FDI to China through both these pathways. While competition from imports drives out the least productive foreign owned firms, export expansion of firms using FDI will lead to an overall increase in foreign investment. In addition, the facilitation of trade in intermediate goods tends to promote vertical FDI. The direct FDI effect from investment liberalization will evidently promote FDI from partners. Projected economic gains to China from RCEP are in the range of US$103–214 billion, or 1.1–2.2% of GDP.

Suggested Citation

  • Li, Qiaomin & Scollay, Robert & Gilbert, John, 2017. "Analyzing the effects of the Regional Comprehensive Economic Partnership on FDI in a CGE framework with firm heterogeneity," Economic Modelling, Elsevier, vol. 67(C), pages 409-420.
    • Handle: RePEc:eee:ecmode:v:67:y:2017:i:c:p:409-420
    DOI: 10.1016/j.econmod.2017.07.016
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    Cited by:

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    2. Zhou, Lingling & Pan, Chen & He, Jianwu & Li, Shantong, 2021. "The Impact of RCEP on Chinese Regional Economy from Global Value Chains Perspective," Conference papers 333306, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Thompson, Edmund R. & Dericks, Gerard H. & Fai, Felicia, 2019. "Development and validation of a firm-level vertical and horizontal internationalization metric," International Business Review, Elsevier, vol. 28(3), pages 533-543.
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    6. Michael Frenkel & Tuyet Ngo, 2021. "Das RCEP-Abkommen und dessen Bedeutung für die EU [The RCEP and Its Relevance to the EU]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(6), pages 432-438, June.
    7. Durán Lima, José Elías & Aguiar, Angel & Ronzheimer, Ira Nadine, 2021. "Economic and social effects of a possible trade agreement between Latin America and the Asia-Pacific region," Comercio Internacional 47659, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. Jun Zhai & Zhuo Ning, 2022. "Models for the Economic Impacts of Forest Disturbances: A Systematic Review," Land, MDPI, vol. 11(9), pages 1-16, September.
    9. A. Kuznetsov V. & А. Кузнецов В., 2018. "Интеграционные процессы в АТР с участием Китая и позиция России // Integration Processes in the asia-Pacific Region with the Participation of China and the Position of Russia," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 22(6), pages 95-105.

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    More about this item

    Keywords

    F15; F47; C68; RCEP; FDI; Firm heterogeneity; CGE;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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