Premium
The importance of heterogeneity in determining the effects of preferential trade agreements on Foreign Direct Investment
Author(s) -
Hiraide Norikatsu,
Shen Leilei,
Silva Peri
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12994
Subject(s) - foreign direct investment , margin (machine learning) , international economics , economics , international trade , monetary economics , macroeconomics , computer science , machine learning
This paper investigates the importance of PTA formation in attracting inflows of foreign direct investment (FDI). In particular, we examine the heterogeneous effects of different types of PTAs (FTAs or CUs) on the extensive and intensive margins of FDI and on how the interdependence among various PTAs may affect a country's ability to attract FDI inflows. We find that the larger the preferential markets to which a country has access, the larger the FDI inflows the country receives. Furthermore, we find that the type of PTA matters in determining FDI inflows. In this case, we find that the formation of CUs tends to promote more FDI inflows than the formation of FTAs. Our findings also indicate that the formation of PTAs significantly affects FDI through the intensive margin, rather than through the extensive margin. Importantly, notice that these effects are driven by the preferential markets to which a country has access and that have not established a PTA with the FDI‐originating (home) country, confirming that PTA interdependence matters in determining FDI inflows.