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North American Integration and Canadian Foreign Direct Investment

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Author Info
Waldkirch, Andreas
Tekin-Koru, Ayca

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Abstract

We investigate how economic integration in North America has altered the pattern of foreign direct investment (FDI) to and from Canada. The theoretical analysis suggests that while the Canadian-U.S. free trade agreement should generate less FDI, the addition of Mexico in the North American Free Trade Agreement (NAFTA) produces the opposite effect. The fall in trade costs results in investment diversion from the U.S. and Canada, yet lower fixed costs may increase FDI even in those countries via an increased incentive to locate production facilities abroad rather than only domestically. Using a difference-in-differences estimator, we find that U.S. FDI in Canada as well as Canadian FDI in the U.S. have expanded disproportionately since NAFTA, suggesting that the latter effect dominates.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12968.

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Date of creation: Jan 2009
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Handle: RePEc:pra:mprapa:12968

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Related research
Keywords: Foreign Direct Investment; Multinationals; NAFTA; Canada;

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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  1. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2003. "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment," American Economic Review, American Economic Association, vol. 93(3), pages 980-994, June. [Downloadable!]
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  2. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February. [Downloadable!] (restricted)
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  3. Peter J. Buckley & Jeremy Clegg & Nicolas Forsans & Kevin T. Reilly, 2007. "A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: The Canada-United States Relationship in the Context of Free Trade," The World Economy, Blackwell Publishing, vol. 30(2), pages 267-291, 02. [Downloadable!] (restricted)
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  4. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November. [Downloadable!] (restricted)
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  5. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany. [Downloadable!]
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  6. Grossman, Gene M. & Helpman, Elhanan & Szeidl, Adam, 2006. "Optimal integration strategies for the multinational firm," Journal of International Economics, Elsevier, vol. 70(1), pages 216-238, September. [Downloadable!] (restricted)
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  7. Tekin-Koru, Ayca & Waldkirch, Andreas, 2008. "North-South Integration and the Location of Foreign Direct Investment," MPRA Paper 6912, University Library of Munich, Germany. [Downloadable!]
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  8. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June. [Downloadable!] (restricted)
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  9. David L. Carr & James R. Markusen & Keith E. Maskus, 2003. "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Reply," American Economic Review, American Economic Association, vol. 93(3), pages 995-1001, June. [Downloadable!]
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  13. Andreas Waldkirch, 2003. "The 'new regionalism' and foreign direct investment: the case of Mexico," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 12(2), pages 151-184, June. [Downloadable!] (restricted)
  14. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 776-795, 06. [Downloadable!] (restricted)
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  15. Braconier, Henrik & Norback, Pehr-Johan & Urban, Dieter, 2005. "Multinational enterprises and wage costs: vertical FDI revisited," Journal of International Economics, Elsevier, vol. 67(2), pages 446-470, December. [Downloadable!] (restricted)
  16. Steven Globerman & Daniel M Shapiro, 1999. "The Impact of Government Policies on Foreign Direct Investment: The Canadian Experience," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 30(3), pages 513-532, September. [Downloadable!] (restricted)
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