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North American Integration and the Location of Foreign Direct Investment

  • Tekin-Koru, Ayca
  • Waldkirch, Andreas

We investigate how the North American Free Trade Agreement (NAFTA) has altered the pattern of foreign direct investment (FDI) in North America. The theoretical analysis suggests that NAFTA affects the incentives of U.S. and non-U.S. firms locating in Mexico differently and may lead to investment diversion from the U.S. Combining U.S. and Mexican FDI data and using a difference-in-differences estimator, we find that U.S. FDI in Mexico has increased since the inception of NAFTA in a manner that cannot be explained entirely by the usual FDI determinants. Other countries have been using Mexico as an export platform since before NAFTA with no discernible positive effect from the agreement. We find little evidence that inward U.S. FDI has been diverted. The results are robust to a number of different model and econometric specifications as well as the skill data used.

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File URL: http://mpra.ub.uni-muenchen.de/5212/1/MPRA_paper_5212.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5212.

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Date of creation: Jul 2007
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Handle: RePEc:pra:mprapa:5212
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  1. Gene M. Grossman & Elhanan Helpman & Adam Szeidl, 2003. "Optimal Integration Strategies for the Multinational Firm," Harvard Institute of Economic Research Working Papers 2024, Harvard - Institute of Economic Research.
  2. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  3. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
  4. Andreas Waldkirch, 2004. "The 'New Regionalism': Integration as a Commitment Device for Developing Countries," International Trade 0412004, EconWPA.
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  9. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
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  11. Fernandez-Arias, Eduardo & Spiegel, Mark M., 1996. "North-South customs unions and international capital mobility," Policy Research Working Paper Series 1573, The World Bank.
  12. Alfredo Cuevas & Miguel Messmacher & Alejandro Werner, 2005. "Foreign Direct Investment in Mexico since the Approval of," World Bank Economic Review, World Bank Group, vol. 19(3), pages 473-488.
  13. Ethier, Wilfred J, 1998. "The New Regionalism," Economic Journal, Royal Economic Society, vol. 108(449), pages 1149-61, July.
  14. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
  15. 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.
  16. Braconier, Henrik & Norback, Pehr-Johan & Urban, Dieter, 2005. "Multinational enterprises and wage costs: vertical FDI revisited," Journal of International Economics, Elsevier, vol. 67(2), pages 446-470, December.
  17. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  18. Andreas Waldkirch, 2003. "The 'new regionalism' and foreign direct investment: the case of Mexico," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 12(2), pages 151-184.
  19. James R. Markusen & Keith E. Maskus, 2001. "General-Equilibrium Approaches to the Multinational Firm: A Review of Theory and Evidence," NBER Working Papers 8334, National Bureau of Economic Research, Inc.
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