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Regional Integration and the Location of FDI

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Author Info
Eduardo Levy Yeyati
Ernesto H. Stein
Christian Daude

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Abstract

This paper studies the impact of regional integration agreements (RIAs) on the location of foreign direct investment (FDI), using data on bilateral outward FDI stocks from the OECD International Direct Investment Statistics. The dataset covers FDI from 20 source countries, all of them from the OECD, to 60 host countries, from 1982 through 1999. Using panel data analysis with country-pair fixed effects, we find that common membership in an RIA with a source country increases FDI from that source by around 27 percent. Countries that are more open, and whose factor proportions differ more from those in the source country are likely to benefit more, as they tend to receive FDI of the vertical variety, which responds more favorably to integration. We also find that the increase in the size of the market associated with regional integration initiatives contributes to attract more FDI to the RIA as a whole. However, only the countries in the RIA that offer a more attractive overall environment for FDI are likely to be winners in this game. Finally, we also find evidence of a small FDI diversion effect. Our results suggest that regional integration, on average, contributes to attracting FDI, but the benefits are unlikely to be distributed evenly.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 4343.

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Date of creation: Jul 2003
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Handle: RePEc:idb:wpaper:4343

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Eaton Jonathan & Tamura Akiko, 1994. "Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns," Journal of the Japanese and International Economies, Elsevier, vol. 8(4), pages 478-510, December. [Downloadable!] (restricted)
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Full references

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "The Cyclical Nature of North-South FDI Flows," RES Working Papers 4317, Inter-American Development Bank, Research Department. [Downloadable!]
    Other versions:
  2. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2007. "Estimating Regional Trade Agreement Effects on FDI in an Interdependent World," Center for Policy Research Working Papers 100, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
    Other versions:
  3. Aradhna Aggarwal, . "Regional Economic Integration and FDI in South Asia : Prospects and Problems," Indian Council for Research on International Economic Relations, New Delhi Working Papers 218, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  4. Eduardo Levy Yeyati & Ernesto Stein & Christian Daude, 2004. "The FTAA And The Location Of FDI," Working Papers Central Bank of Chile 281, Central Bank of Chile. [Downloadable!]
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  5. Medvedev, Denis, 2006. "Beyond trade : the impact of preferential trade agreements on foreign direct investment inflows," Policy Research Working Paper Series 4065, The World Bank. [Downloadable!]
  6. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "La naturaleza cíclica de los flujos norte-sur de inversión extranjera directa," RES Working Papers 4318, Inter-American Development Bank, Research Department. [Downloadable!]
  7. Simon J. Evenett, 2003. "Do all networks facilitate international commerce? US law firms and the international market for corporate control," NBER Working Papers 9663, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Julia Kubny & Florian Mölders & Peter Nunnenkamp, 2008. "Regional Integration and FDI in Emerging Markets," Kiel Working Papers 1418, Kiel Institute for the World Economy. [Downloadable!]
  9. Eduardo Levy Yeyati & Ernesto H. Stein & Christian Daude, 2003. "El ALCA y el destino de la inversión extranjera directa," RES Working Papers 4342, Inter-American Development Bank, Research Department. [Downloadable!]
  10. Peter Egger & Simon Loretz & Michael Pfaffermayr & Hannes Winner, 2008. "Bilateral Effective Tax Rates and Foreign Direct Investment," Working Papers 0802, Oxford University Centre for Business Taxation. [Downloadable!]
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