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A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: The Canada-United States Relationship in the Context of Free Trade

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Listed:
  • Peter J. Buckley
  • Jeremy Clegg
  • Nicolas Forsans
  • Kevin T. Reilly

Abstract

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 .

Suggested Citation

  • 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, Wiley Blackwell, vol. 30(2), pages 267-291, February.
  • Handle: RePEc:bla:worlde:v:30:y:2007:i:2:p:267-291
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
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    8. 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.
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    11. 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.
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    14. 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.
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    1. repec:spr:manint:v:51:y:2011:i:1:d:10.1007_s11575-010-0062-z is not listed on IDEAS
    2. Waldkirch Andreas & Tekin-Koru Ayça, 2010. "North American Integration and Canadian Foreign Direct Investment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-40, August.
    3. Ahmed, Saira & Ahmed, Zafar & Sohail, Safder & Sarfraz, Irfan & Shafqat, Mohammad & Mamoon, Dawood & Saadia, Hissam, 2012. "Lessons Drawn From Pakistan-Sri Lanka FTA," MPRA Paper 81488, University Library of Munich, Germany.
    4. Arun, Korhan & Yıldırım, Durmuş Çağrı, 2017. "Effects of Foreign Direct Investment on Intellectual Property, Patents and R&D," MPRA Paper 80470, University Library of Munich, Germany.
    5. Andrew R. Blair, 2017. "United States Manufacturing Direct Investment and Trade: The Case of Canada and Mexico under NAFTA and Earlier Trade Liberalization Measures," Review of Economics & Finance, Better Advances Press, Canada, vol. 7, pages 50-65, February.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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