A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: The Canada-United States Relationship in the Context of Free Trade
This paper asks a simple question: Did Wilfred Laurier's dream of free trade with the United States, when it came to fruition in 1989, also impact on foreign direct investment (FDI) into Canada by US multinationals? This paper argues that the customary static econometric approach found in the FDI literature, along with the assumption that policy changes influence only the intercept term, are inadequate to address the question. Instead we introduce an innovative dynamic framework to support the testing of hypotheses on behavioural changes in the variables using a structural break framework. A key conclusion is that prior to signing the free trade agreement US FDI responded only to current growth in the Canadian economy, in a unitary fashion, and current exchange rate shifts. This can be described as a static relationship. The implementation of the free trade agreements between Canada and the USA increased the responsiveness of US FDI to growth in the Canadian economy by a factor greater than two. Furthermore, dynamics are found in the form of a lagged effect for changes in the growth in the Canadian economy and interest rate differentials. These conclusions challenge the dominant view, including that in official policy circles, that the free trade agreement had no impact on US firms' FDI decisions in Canada. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd .
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 30 (2007)
Issue (Month): 2 (02)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0378-5920 |
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0378-5920|
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.:
- Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
- Buckley, Peter J & Casson, Mark, 1981. "The Optimal Timing of a Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 91(361), pages 75-87, March.
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- Guy V.G. Stevens & Robert E. Lipsey, 1988.
"Interactions between domestic and foreign investment,"
International Finance Discussion Papers
329, Board of Governors of the Federal Reserve System (U.S.).
- Stevens, Guy V. G. & Lipsey, Robert E., 1992. "Interactions between domestic and foreign investment," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 40-62, February.
- Robert E. Lipsey & Guy V.G. Stevens, 1988. "Interactions between Domestic and Foreign Investment," NBER Working Papers 2714, National Bureau of Economic Research, Inc.
- Barrell, Ray & Pain, Nigel, 1999. "Trade restraints and Japanese direct investment flows," European Economic Review, Elsevier, vol. 43(1), pages 29-45, January.
- Buckley, Peter J. & Clegg, Jeremy & Forsans, Nicolas & Reilly, Kevin T., 2003. "Evolution of FDI in the United States in the context of trade liberalization and regionalization," Journal of Business Research, Elsevier, vol. 56(10), pages 853-857, October.
- Kyriacos Aristotelous & Stilianos Fountas, 1996. "An Empirical Analysis of Inward Foreign Direct Investment Flows in the EU with Emphasis on the Market Enlargement Hypothesis," Journal of Common Market Studies, Wiley Blackwell, vol. 34(4), pages 571-583, December.
- Klein, Michael W. & Rosengren, Eric, 1994.
"The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects,"
Journal of International Economics,
Elsevier, vol. 36(3-4), pages 373-389, May.
- Michael W. Klein & Eric Rosengren, 1992. "The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects," NBER Working Papers 4192, National Bureau of Economic Research, Inc.
- Michael W. Klein & Eric S. Rosengren, 1992. "The real exchange rate and foreign direct investment in the United States: relative wealth vs. relative wage effects," Working Papers 92-2, Federal Reserve Bank of Boston.
- Guy V.G. Stevens, 1993. "Exchange rates and foreign direct investment: a note," International Finance Discussion Papers 444, Board of Governors of the Federal Reserve System (U.S.).
- Boatwright, B D & Renton, G A, 1975. "An Analysis of United Kingdom Inflows and Outflows of Direct Foreign Investment," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 478-86, November.
- Gordon H. Hanson & Raymond J. Mataloni, Jr. & Matthew J. Slaughter, 2001.
"Expansion Strategies of U.S. Multinational Firms,"
NBER Working Papers
8433, National Bureau of Economic Research, Inc.
- Scaperlanda, Anthony & Balough, Robert S., 1983. "Determinants of U.S. direct investment in the E.E.C. : Revisited," European Economic Review, Elsevier, vol. 21(3), pages 381-390, May.
- Susan Scott-Green & Jeremy Clegg, 1999. "The Determinants of New FDI Capital Flows into the EC: A Statistical Comparison of the USA and Japan," Journal of Common Market Studies, Wiley Blackwell, vol. 37(4), pages 597-616, December.
- Lunn, John, 1983. "Determinants of U.S. direct investment in the E.E.C. : Revisited again," European Economic Review, Elsevier, vol. 21(3), pages 391-393, May.
When requesting a correction, please mention this item's handle: RePEc:bla:worlde:v:30:y:2007:i:2:p:267-291. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.