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Openness and Foreign Direct Investment: The Role of Free Trade Agreements in Latin America

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  • Ponce, Aldo Fernando

Abstract

This paper sheds lights the on the performance of Latin American governments in attracting foreign direct investment (FDI) through trade policies, specifically by signing free trade agreements with other countries. The relationship between FDI and trade for Latin America has previously been analyzed. In these studies, the relationship between the degree of “openness” (imports plus exports divided by the domestic product) and FDI has not been conclusive. At the same time, the effect of specific trade policies on FDI flows has not been extensively studied. Some state policies on trade could produce a significant impact in attracting FDI. Specifically, through the implementation of several free trade agreements, several Latin American countries have been able to attract greater flows of foreign direct investment. The implementation of these free trade agreements was part of a more general plan of economic reforms that Latin American countries launched since the mid-1980s. The goals of these reforms were to adjust their economies and improve their competitiveness by liberalizing trade, privatizing, and deregulating their markets. Those countries that signed more free trade agreements – or signed them with the largest economies in the world –increased their effectiveness in attracting FDI. I test the impact of this policy on the behavior of FDI flows through a panel data model for seventeen Latin American countries and for the period ranging from 1985 to 2003.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:4187
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    File URL: https://mpra.ub.uni-muenchen.de/8858/1/MPRA_paper_8858.pdf
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    References listed on IDEAS

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    2. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
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    5. Raff, Horst, 2004. "Preferential trade agreements and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2745-2763, December.
    6. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-783, November.
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    Cited by:

    1. Selahattin GURIS & Kutay GOZGOR, 2015. "Trade Openness and FDI Inflows in Turkey," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 15(2), pages 53-62.

    More about this item

    Keywords

    free trade agreements; foreign direct investment; Latin America;

    JEL classification:

    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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