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

  • Ponce, Aldo Fernando

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4187.

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Date of creation: 01 Oct 2006
Date of revision: 01 Jul 2007
Handle: RePEc:pra:mprapa:4187
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  1. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
  2. 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 757-83, November.
  3. Neary, J Peter, 2002. "Foreign Direct Investment and the Single Market," Manchester School, University of Manchester, vol. 70(3), pages 291-314, June.
  4. John H Dunning, 1980. "Towards an Eclectic Theory of International Production: Some Empirical Tests," Journal of International Business Studies, Palgrave Macmillan, vol. 11(1), pages 9-31, March.
  5. Horst Raff, 2002. "Preferential Trade Agreements and Tax Competition for Foreign Direct Investment," CESifo Working Paper Series 763, CESifo Group Munich.
  6. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  7. Narula, Rajneesh & Wakelin, Katharine, 1998. "Technological competitiveness, trade and foreign direct investment," Structural Change and Economic Dynamics, Elsevier, vol. 9(3), pages 373-387, September.
  8. Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), 1996. "Private Capital Flows to Emerging Markets after the Mexican Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 49.
  9. Linda S. Goldberg & Joseph Tracy, 2001. "Exchange rates and wages," Staff Reports 116, Federal Reserve Bank of New York.
  10. Shabtai Donnenfeld, 2003. "Regional Blocs and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 770-788, November.
  11. Lionel Fontagné, 1999. "Foreign Direct Investment and International Trade: Complements or Substitutes?," OECD Science, Technology and Industry Working Papers 1999/3, OECD Publishing.
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