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A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: Did Canada Benefit From the Free Trade Agreements with the United States?

  • Peter J. Buckley

    (Leeds University Business School)

  • Jeremy Clegg

    (Leeds University Business School)

  • Nicolas Forsans

    (Leeds University Business School)

  • Kevin T. Reilly

    (Leeds University Business School)

This paper asks a simple question: Did Wilfred Laurier’s dream of free trade with the United States, when it came to fruition in 1989, also have a benefit by increasing foreign direct investment (FDI) into Canada by US multinationals? This paper introduces a dynamic framework, rather than the literature’s traditional static framework, and uses a structural break framework, rather than modelling policy changes as an intercept shift alone. Its conclusions are (a) The signing of the free trade agreements between Canada and the United States increased the responsiveness of growth in the Canadian economy on the US FDI decision by a factor of two. (b) Limited dynamics are found in the form of lagged effect of changes in the real Canadian interest rate. (c) The effect of the change in the exchange rate is static and constant over the whole 1955 to 2000 period and was unaffected by the introduction of free trade between the United States and Canada.

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Paper provided by EconWPA in its series International Finance with number 0407001.

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Length: 53 pages
Date of creation: 04 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0407001
Note: Type of Document - doc; pages: 53. In the context of US-Canada Free Trade agreement proposes two empirical innovations in the modelling of foreign investment.
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Buckley, Peter J. & Clegg, Jeremy & Forsans, Nicolas & Reilly, Kevin T., 2003. "Evolution of FDI in the United States in the context of trade liberalization and regionalization," Journal of Business Research, Elsevier, vol. 56(10), pages 853-857, October.
  2. Guy V.G. Stevens & Robert E. Lipsey, 1988. "Interactions between domestic and foreign investment," International Finance Discussion Papers 329, Board of Governors of the Federal Reserve System (U.S.).
  3. Kyriacos Aristotelous & Stilianos Fountas, 1996. "An Empirical Analysis of Inward Foreign Direct Investment Flows in the EU with Emphasis on the Market Enlargement Hypothesis," Journal of Common Market Studies, Wiley Blackwell, vol. 34(4), pages 571-583, December.
  4. Klein, Michael W. & Rosengren, Eric, 1994. "The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects," Journal of International Economics, Elsevier, vol. 36(3-4), pages 373-389, May.
  5. Barrell, Ray & Pain, Nigel, 1999. "Trade restraints and Japanese direct investment flows," European Economic Review, Elsevier, vol. 43(1), pages 29-45, January.
  6. Susan Scott-Green & Jeremy Clegg, 1999. "The Determinants of New FDI Capital Flows into the EC: A Statistical Comparison of the USA and Japan," Journal of Common Market Studies, Wiley Blackwell, vol. 37(4), pages 597-616, December.
  7. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
  8. Buckley, Peter J & Casson, Mark, 1981. "The Optimal Timing of a Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 91(361), pages 75-87, March.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  10. Guy V.G. Stevens, 1993. "Exchange rates and foreign direct investment: a note," International Finance Discussion Papers 444, Board of Governors of the Federal Reserve System (U.S.).
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