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The Political Economy of FDI flows into Developing Countries: Does the depth of International Trade Agreements Matter?

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  • Arslan Tariq Rana
  • Mazen Kebewar

Abstract

There is considerable debate whether the domestic political institutions (specifically, the country s level of democracy) of the host developing country toward foreign investors are effective in establishing the credibility of commitments are still underway, researchers have also analyzed the effect of international institutions such as (GATT-WTO) membership and Bilateral Investment treaties (BIT) in their role of establishing the credibility of commitment to attract foreign investments. We argue that there are qualitative differences among various types of trade agreements and full-fledged trade agreements (FTA-CU) provide credibility to foreign investors and democracy level in the host country conditions this effect whereas the partial scope agreements (PSA) are not sufficient in providing credibility of commitments and not moderated by democracy. This paper analyses the impact of heterogeneous TAs, and their interaction with domestic institutions, on FDI inflows. Statistical analyses for 122 developing countries from 1970 to 2005 support this argument. The method adopted relies on fixed effects estimator which is robust to control endogeneity on a large panel dataset. The strict erogeneity of results by using a method suggested by Baier and Bergstrand (2007) and no feedback effect found in sample. The results state that (1) More the FTA-CU concluded, larger the amount of FDI inflows are attracted into the developing countries and PSA are insignificant in determining the FDI inflow; (2) FTA CU are complementary to democratic regime whereas the conditional effect of PSA with democracy on levels of FDI inflows is insignificant.

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File URL: http://arxiv.org/pdf/1402.0139
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Paper provided by arXiv.org in its series Papers with number 1402.0139.

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Date of creation: Feb 2014
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Handle: RePEc:arx:papers:1402.0139

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  1. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
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  7. Benhua Yang, 2007. "Autocracy, Democracy, and FDI Inflows to the Developing Countries," International Economic Journal, Taylor & Francis Journals, vol. 21(3), pages 419-439.
  8. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper 2005-03, Federal Reserve Bank of Atlanta.
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  11. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 334-64, October.
  12. Jensen, Nathan M., 2003. "Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment," International Organization, Cambridge University Press, vol. 57(03), pages 587-616, June.
  13. Abbott, Frederick M., 2000. "NAFTA and the Legalization of World Politics: A Case Study," International Organization, Cambridge University Press, vol. 54(03), pages 519-547, June.
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