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Regional Integration and Investment Creation

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  • Denise Eby Konan

    ()
    (Department of Economics, University of Hawaii at Manoa)

  • Jeffrey S Heinrich

Abstract

Preferential trade liberalization has gained more support in recent years from developed and developing countries, with the former hoping that such liberalization will attract more foreign investment. However, the mechanisms by which FDI inflows might increase (if at all) are poorly understood. This paper presents a model featuring firm and plant level scale economies with free entry and exit. The FDI inflows hoped for are likely only to the extent that multinationals have not already shifted production to the integrating region. Regardless, integration is likely to lead to industry rationalization that could reduce FDI if tariff-jumping was prevalent before liberalization. Commutable general equilibrium simulations confirm the magnification effect of the level of external protection on investment creation or diversion, and suggest that low-protection countries have more investment creation than high-protection countries due to wage differences.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/88-98/WP_97-11.pdf
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Bibliographic Info

Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 199711.

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Length: 35 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:hai:wpaper:199711

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Keywords: multinational enterprise; regional integration; preferential trade agreements;

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