Do regional trade agreements stimulate FDI? Evidence for the Agadir, MERCOSUR and AFTA regions

Abstract

The integration of emerging markets into the global economy is heavily promoted by foreign direct investment (FDI) inflows. Among the factors explaining the location of FDI, regional trade agreements (RTAs) can be relevant for emerging markets, as they can promote economic integration and increase the attractiveness of the region for foreign investors. This paper investigates the impact of South–South trade agreements on the FDI decision of multinationals, where the Agadir, mercado comun del sur (MERCOSUR), and ASEAN free trade area (AFTA) agreements are considered. Three panels of countries are defined, where the members joined a specific agreement or not. Non‐Gulf Arab states are compared to better performing regions in Latin America and Southern and Eastern Asia. The analysis provides evidence that openness to foreign trade and financial markets are among the main catalysts to attract FDI, provided that business‐friendly institutions exist in the host country. Other variables, like the size of the industrial sector, urbanization rates, and external debt appear to be important in some cases. The integration of China into the world economy is a specific trigger for FDI to Asian destinations. Since RTAs influence the market size by reducing barriers to trade, their impact operates via GDP growth and openness. Gains from the agreement are striking for Latin America and Asia, but not for Arab states. To attract more FDI, business‐friendly institutional reforms and mechanisms to support new firm foundation should be implemented in this region.

FDI During the First Covid-19 Year in a Developing Country

“…The positive results are consistent with (Nguyen, 2021;Rong et al, 2020). In addition, the Openness to trade positively significant impact on FDI flows to developing countries, the Merchandise trade may have a special path that does not have obstacles between some countries, such as the movement of people between borders, as important as commodities are necessary for crises (Cherif & Dreger, 2018;Sahoo & Dash, 2022).…”

Understanding German FDI in Latin America and Asia: A Comparison of GLM Estimators

“…The third strand of studies, comprising relatively more recent work, focuses on the factors explaining the location of FDI in developing countries. Several studies have examined the impact of the implementation of international investment treaties and regional trade agreements on FDI inflows, such as Büthe and Milner (2008); Dixon and Haslam (2015), or Cherif and Dreger (2018), among others. The work in Antonakakis and Tondl (2015) applied Bayesian statistical techniques to identify the determinants of FDI originating from major OECD investors, including Germany, over the period 1995-2008 in 129 recipient developing countries.…”

Democracy in the neighborhood and foreign direct investment

“…Another important factor that has been considered in gravity models while examining bilateral trade and FDI flows is regional trade agreements (e.g. Baier & Bergstrand, 2007, Balgati, Egger, & Pfaffermayr, 2008; Ullah & Inaba, 2012; Thangavelu & Narjoko, 2014; Chenaf‐Nicet and Rougier, 2016; Martínez‐San Román, Bengoa, & Sánchez‐Robles, 2016; Cherif & Dreger, 2018), which we will also include in our estimations. Furthermore, we control for civil conflict and institutional quality of the host country.…”