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Openness and Foreign Direct Investment: The Role of Free Trade Agreements in Latin America

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  • Ponce, Aldo Fernando

Abstract

This paper sheds lights the on the performance of Latin American governments in attracting foreign direct investment (FDI) through trade policies, specifically by signing free trade agreements with other countries. The relationship between FDI and trade for Latin America has previously been analyzed. In these studies, the relationship between the degree of “openness” (imports plus exports divided by the domestic product) and FDI has not been conclusive. At the same time, the effect of specific trade policies on FDI flows has not been extensively studied. Some state policies on trade could produce a significant impact in attracting FDI. Specifically, through the implementation of several free trade agreements, several Latin American countries have been able to attract greater flows of foreign direct investment. The implementation of these free trade agreements was part of a more general plan of economic reforms that Latin American countries launched since the mid-1980s. The goals of these reforms were to adjust their economies and improve their competitiveness by liberalizing trade, privatizing, and deregulating their markets. Those countries that signed more free trade agreements – or signed them with the largest economies in the world –increased their effectiveness in attracting FDI. I test the impact of this policy on the behavior of FDI flows through a panel data model for seventeen Latin American countries and for the period ranging from 1985 to 2003.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4187.

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Date of creation: 01 Oct 2006
Date of revision: 01 Jul 2007
Handle: RePEc:pra:mprapa:4187

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Keywords: free trade agreements; foreign direct investment; Latin America;

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  1. Massimo Motta & George Norman, 1993. "Does economic integration cause foreign direct investment?," Economics Working Papers 28, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Magnus Blomstrom & Ari Kokko, 1997. "Regional Integration and Foreign Direct Investment," NBER Working Papers 6019, National Bureau of Economic Research, Inc.
  3. Linda Goldberg & Joseph Tracy, 2001. "Exchange rates and wages," Staff Reports 116, Federal Reserve Bank of New York.
  4. J Peter Neary, 2001. "Foreign Direct Iinvestment and the Single Market," Working Papers 200124, School Of Economics, University College Dublin.
  5. Narula ,Rajneesh & Wakelin ,Katharine, 1995. "Technological competitiveness, trade and foreign direct investment," Research Memorandum 013, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
  6. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  7. Horst Raff, 2002. "Preferential Trade Agreements and Tax Competition for Foreign Direct Investment," CESifo Working Paper Series 763, CESifo Group Munich.
  8. Shabtai Donnenfeld, 2003. "Regional Blocs and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 770-788, November.
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