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Is FTA/EPA effective for a developing country to attract FDI? The knowledge‐capital model revisited

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  • Kazuhiko Oyamada

Abstract

To prepare an answer to the question of how a developing country can attract foreign direct investment (FDI), this paper explored the factors and policies that may help bring FDI into a developing country by utilising an extended version of the knowledge‐capital model. With a special focus on the effects of a free trade agreement (FTA) or an economic partnership agreement (EPA) between a pair of market and non‐market countries, simulations with the model revealed the following: (i) although FTA/EPA generally tends to increase FDI to a developing country, the possibility of improving welfare through increased demand for skilled and unskilled labour decreases as the size of the country grows; (ii) a developing country may suffer severe welfare losses through FTA/EPA if the availability of skilled labour is extremely limited; and (iii) a developing country can enhance welfare gains from a FTA, and it is even possible to recover the welfare effects from negative to positive, by making the arrangement an EPA.

Suggested Citation

  • Kazuhiko Oyamada, 2019. "Is FTA/EPA effective for a developing country to attract FDI? The knowledge‐capital model revisited," The World Economy, Wiley Blackwell, vol. 42(3), pages 759-784, March.
    • Handle: RePEc:bla:worlde:v:42:y:2019:i:3:p:759-784
    DOI: 10.1111/twec.12738
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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
    2. Grossman, Gene M. & Helpman, Elhanan & Szeidl, Adam, 2006. "Optimal integration strategies for the multinational firm," Journal of International Economics, Elsevier, vol. 70(1), pages 216-238, September.
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    1. Oyamada, Kazuhiko, 2020. "How does BREXIT affect production patterns of multinational enterprises?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 1-19.
    2. Anh T. N. Nguyen & Andrzej Cieślik, 2021. "Determinants of foreign direct investment from Europe to Asia," The World Economy, Wiley Blackwell, vol. 44(6), pages 1842-1858, June.
    3. Adolfo Maza & Paula Gutiérrez‐Portilla & José Villaverde, 2020. "On the drivers of UK direct investment in the Spanish regions: A spatial Durbin approach," Growth and Change, Wiley Blackwell, vol. 51(2), pages 646-675, June.

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