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Regional Blocs and Foreign Direct Investment

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  • Shabtai Donnenfeld

Abstract

The paper examines the impact of the emergence of regional blocs on the patterns of interbloc and intrabloc trade when firms have the option to engage in foreign direct investment (FDI). For exogenously given external tariffs, when firms have the option to engage in FDI, all interbloc trade may cease-complete trade diversion that is replaced by interbloc FDI investment creation. In such an event the volume of world trade declines but this is more than offset by the increase in world output due to direct investment. The paper also investigates the optimal tariff that a trading bloc levies on imports from nonmember countries. The tariffs are restricted by the option to engage in two-way direct investment; hence, the regional blocs are hampered from mutually harming one another through an escalation in the tariff war. Finally, the formation of two regional blocs enhances the welfare of all countries. Copyright Blackwell Publishing Ltd 2003.

Suggested Citation

  • Shabtai Donnenfeld, 2003. "Regional Blocs and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 770-788, November.
  • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:770-788
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    Citations

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    Cited by:

    1. Ponce, Aldo Fernando, 2006. "Openness and Foreign Direct Investment: The Role of Free Trade Agreements in Latin America," MPRA Paper 4187, University Library of Munich, Germany, revised 01 Jul 2007.
    2. Thangavelu, Shandre M. & Narjoko, Dionisius, 2014. "Human capital, FTAs and foreign direct investment flows into ASEAN," Journal of Asian Economics, Elsevier, vol. 35(C), pages 65-76.
    3. 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.
    4. Denise Eby KONAN & Jeff HEINRICH, "undated". "Regional Integration and the (Re)distribution of Foreign Investment between Asymmetric Hosts," EcoMod2009 21500054, EcoMod.
    5. repec:bla:reviec:v:25:y:2017:i:4:p:733-759 is not listed on IDEAS
    6. Verico, Kiki, 2012. "The Impact of Intra Regional Trade Agreement on FDI Inflows in Southeast Asia: Case of Indonesia, Malaysia and Thailand," MPRA Paper 42087, University Library of Munich, Germany, revised 20 Oct 2012.
    7. 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.
    8. Kim, Young-Han, 2009. "Cross-border M&A vs. greenfield FDI: Economic integration and its welfare impact," Journal of Policy Modeling, Elsevier, vol. 31(1), pages 87-101.
    9. 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.
    10. MUKONOKI Hiroshi, 2013. "On the Welfare Effect of FTAs in the Presence of FDIs and Rules of Origin," Discussion papers 13053, Research Institute of Economy, Trade and Industry (RIETI).
    11. Denise Eby Konan & Jeff Heinrich, 2008. "Regional Integration and the (Re)Distrubtion of Foreign Direct Investment between Asymmetric Hosts," DEGIT Conference Papers c013_002, DEGIT, Dynamics, Economic Growth, and International Trade.
    12. CUYVERS, Ludo & PLASMANS, Joseph & SOENG, Reth & VAN DEN BULCKE, Daniƫl, 2008. "Determinants of foreign direct investment in Cambodia: Country-specific factor differentials," Working Papers 2008003, University of Antwerp, Faculty of Applied Economics.

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