The Impact of Bilateral Free Trade Agreements on Bilateral Foreign Direct Investment Among Developed Countries

24 Pages Posted: 28 Sep 2011  

Yong Joon Jang

Korea Institute for International Economic Policy

Date Written: September 2011

Abstract

Previous studies find that a trade treaty positively impacts foreign direct investment (FDI). But does a trade treaty always have positive effects on FDI? What is the effect of bilateral free trade agreement (FTA) on bilateral FDI among developed countries? Based on the Knowledge‐Capital model, I hypothesize that bilateral FTA has negative effects on bilateral FDI in developed–developed country pairs, but positive effects in developed–developing country pairs. To test this hypothesis empirically, I conduct the within estimator, the Difference‐in‐Difference estimator and the Arellano–Bond estimator with panel data of bilateral FTA and outward FDI in 30 OECD countries and 32 non‐OECD countries between 1982 and 2005. The result supports the hypothesis. The existence of bilateral FTA decreases bilateral FDI in the OECD–OECD country pairs but increases bilateral outward FDI in the OECD–non‐OECD country pairs. The finding of negative effects of bilateral FTA on FDI is robust to different country classifications by gross national income (GNI) per capita and secondary school enrolment. Hence, the results are consistent with what Carr et al. (2001) predicts about the effects of trade cost on FDI in developed–developed country pairs and in developed–developing country pairs.

Suggested Citation

Jang, Yong Joon, The Impact of Bilateral Free Trade Agreements on Bilateral Foreign Direct Investment Among Developed Countries (September 2011). The World Economy, Vol. 34, Issue 9, pp. 1628-1651, 2011. Available at SSRN: https://ssrn.com/abstract=1934604 or http://dx.doi.org/10.1111/j.1467-9701.2011.01356.x

Yong Joon Jang (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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