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Foreign Direct Investment and Regional Trade Agreements

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Author Info

  • Florence Jaumotte

Abstract

The paper investigates whether the market size of a regional trade agreement (RTA) is a determinant of foreign direct investment (FDI) received by countries participating in the RTA. This hypothesis is tested on a sample of 71 developing countries during the period 1980-99. Evidence is found that the RTA market size had a positive impact on the FDI received by member countries, even more so in the 1990s when such agreements were revived and became more widespread. The size of domestic population also seemed to matter, possibly because of its effect on the availability of the labor supply. It appears, however, that not all countries in the RTA benefited to the same extent from the RTA: countries with a relatively more educated labor force and/or a relatively more stable financial situation tended to attract a larger share of FDI at the expense of their RTA partners. This evidence suggests it is essential for all RTA countries to improve their business environment to the best available in the region. Finally, a partial negative correlation between the FDI received by RTA countries and that received by non-RTA countries possibly reflects a diversion of FDI from non-RTA to RTA countries. As an illustration, FDI benefits are simulated from the creation of a regional trade agreement between Algeria, Morocco, and Tunisia.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/206.

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Length: 32
Date of creation: 01 Nov 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/206

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Related research

Keywords: Foreign direct investment; Trade models; fdi; market size; domestic market; direct investment; regional trade; partner countries; regional trade agreements; trade agreements; common market; trade agreement; trade diversion; economic integration; trade openness; world investment; internal market; foreign investment; measure of trade; balance of payments; free trade; international trade; preferential agreements; internal tariffs; regional integration; international investment; trade integration; export barriers; trade data; domestic taxes; foreign direct investor; dynamic benefits; trade creation; openness measure; transport costs; foreign investors; andean pact; external tariff; foreign investment advisory service; manufacturing sector; dynamic gains; non-tariff barriers; increasing growth; trade arrangements; tariff barriers; import barriers; host country; direct foreign investment; multilateral free trade; domestic producers; member country; regional trade arrangements; market sizes; economic community; macroeconomic stability; trade liberalization; external protection;

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References

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  1. Singh, Harinder & Kwang W. Jun, 1995. "Some new evidence on determinants of foreign direct investment in developing countries," Policy Research Working Paper Series 1531, The World Bank.
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  9. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  10. Blomström, Magnus & Globerman, Steve & Kokko, Ari, 2000. "The Determinants of Host Country Spillovers from Foreign Direct Investment," CEPR Discussion Papers 2350, C.E.P.R. Discussion Papers.
  11. Robert J Barro, 1999. "Determinants of Economic Growth: Implications of the Global Evidence for Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 36(107), pages 443-478.
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Citations

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Cited by:
  1. Annageldy Arazmuradov, 2012. "Foreign Aid, Foreign Direct Investment, and Domestic Investment Nexus in Landlocked Economies of Central Asia," Economic Research Guardian, Weissberg Publishing, vol. 2(1), pages 129-151, May.
  2. 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.
  3. Puah, Chin-Hong & Kueh, Jerome Swee-Hui & Lau, Evan, 2007. "The Implications Of Emergence Of China Towards Asean-5: Fdi-Gdp Perspective," MPRA Paper 4550, University Library of Munich, Germany.
  4. Halis M. Yildiz, 2013. "Foreign direct investment and customs union: Incentives for multilateral tariff cooperation over free trade," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 22(2), pages 298-316, March.
  5. Heather D. Gibson & Nicholas T. Tsaveas & Thomas Vlassopoulos, 2006. "Capital Flows, Capital Account Liberalisation and the Mediterranean Countries," Working Papers 33, Bank of Greece.
  6. Innwon Park & Soonchan Park, 2008. "Reform Creating Regional Trade Agreements And Foreign Direct Investment: Applications For East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(5), pages 550-566, December.
  7. Jose R. Lopez-Calix & Peter Walkenhorst & Ndiame Diop, 2010. "Trade Competitiveness of the Middle East and North Africa : Policies for Export Diversification," World Bank Publications, The World Bank, number 2466, October.
  8. Alicia Garcia-Herrero & Daniel Santabarbara, 2005. "Does China have an impact on foreign direct investment to Latin America?," International Finance 0508010, EconWPA.
  9. Agustin Carstens, 2004. "Making Regional Economic Integration Work," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 335-352.
  10. Paul Missios & Halis Murat Yildiz & Ida Ferrara, 2009. "Foreign Direct Investment and the Choice of Environmental Policy," Working Papers 004, Ryerson University, Department of Economics.
  11. Normaz Ismail, 2009. "The Determinant of Foreign Direct Investment in ASEAN: A Semi-Gravity Approach," Transition Studies Review, Springer, vol. 16(3), pages 710-722, October.
  12. Medvedev, Denis, 2012. "Beyond Trade: The Impact of Preferential Trade Agreements on FDI Inflows," World Development, Elsevier, vol. 40(1), pages 49-61.
  13. Bouoiyour, Jamal & Rey, Serge, 2005. "Régime de change, taux de change réel, flux commerciaux et investissements directs étrangers: le cas du Maroc
    [Real exchange rate, trade flows and foreign direct investments: the Moroccan case]
    ," MPRA Paper 49503, University Library of Munich, Germany.

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