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Outward FDI from a Free Trade Area: the Small Open Economy Case

  • Yu-Ter Wang

    ()

    (Department of Economics, Ming Chuan University)

In a simple three-country model where two countries sign a free trade agreement eliminating restrictions on trade and investment between them, this paper shows that any benefits accruing to the investing country from engaging in outward FDI will depend on the difference between the net return from investing in the third country and the equilibrium return on investment between the two signatories, as well as the direction of the initial capital flow between the signatories. Furthermore, the spillover effect d by the outward FDI may benefit the other signatory that initially owns some of the capital stock of its counterpart.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 6 (2008)
Issue (Month): 47 ()
Pages: 1-7

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Handle: RePEc:ebl:ecbull:eb-08f10027
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  1. James R. Markusen & Anthony J. Venables, 1997. "Foreign Direct Investment as a Catalyst for Industrial Development," NBER Working Papers 6241, National Bureau of Economic Research, Inc.
  2. Carlo Altomonte, 2007. "Regional Economic Integration and the Location of Multinational Firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(2), pages 277-305, July.
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  4. Bhagwati, Jagdish N & Dinopoulos, Elias & Wong, Kar-yiu, 1992. "Quid Pro Quo Foreign Investment," American Economic Review, American Economic Association, vol. 82(2), pages 186-90, May.
  5. Braconier, Henrik & Baldwin, Richard E. & Forslid, Rikard, 1999. "Multinationals, Endogenous Growth and Technological Spillovers: Theory and Evidence," Working Paper Series 519, Research Institute of Industrial Economics.
  6. Buch, Claudia M. & Kleinert, Jorn & Toubal, Farid, 2006. "Where enterprises lead, people follow? Links between migration and FDI in Germany," European Economic Review, Elsevier, vol. 50(8), pages 2017-2036, November.
  7. Gao, Ting, 2005. "Foreign direct investment and growth under economic integration," Journal of International Economics, Elsevier, vol. 67(1), pages 157-174, September.
  8. Webb, Michael A., 1990. "Preferential trading agreements and capital flows," Journal of Development Economics, Elsevier, vol. 32(1), pages 181-190, January.
  9. Brecher, Richard A. & Findlay, Ronald, 1983. "Tariffs, foreign capital and national welfare with sector-specific factors," Journal of International Economics, Elsevier, vol. 14(3-4), pages 277-288, May.
  10. Miyagiwa, Kaz F. & Young, Leslie, 1986. "International capital mobility and commercial policy in an economic region," Journal of International Economics, Elsevier, vol. 20(3-4), pages 329-341, May.
  11. David Greenaway & Richard Kneller, 2007. "Firm heterogeneity, exporting and foreign direct investment," Economic Journal, Royal Economic Society, vol. 117(517), pages F134-F161, 02.
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