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Regional Integration and the Location of FDI

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Author Info
Eduardo Levy Yeyati
Christian Daude
Ernesto Stein

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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 Universidad Torcuato Di Tella in its series Business School Working Papers with number doce.

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Length: 36 pages
Date of creation: 26 Sep 2003
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Handle: RePEc:udt:wpbsdt:doce

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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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  12. Bruce A. Blonigen & Ronald B. Davies, 2000. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," NBER Working Papers 7929, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December. [Downloadable!] (restricted)
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Cited by:
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  1. 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!]
  2. 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!]
  3. 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!]
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