Regional Integration and the Location of FDI

IADB Research Department Working Paper No. 492

Posted: 19 Apr 2004

See all articles by Eduardo Levy Levy-Yeyati

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Ernesto Stein

Inter-American Development Bank (IDB)

Christian Daude

Inter-American Development Bank (IADB)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2003

Abstract

This paper studies the impact of regional integration agreements (RIAs) on the location of foreign direct investment (FDI), using data on bilateral outward FDI stocks from the OECD International Direct Investment Statistics. The dataset covers FDI from 20 source countries, all of them from the OECD, to 60 host countries, from 1982 through 1999. Using panel data analysis with country-pair fixed effects, we find that common membership in an RIA with a source country increases FDI from that source by around 27 percent. Countries that are more open, and whose factor proportions differ more from those in the source country are likely to benefit more, as they tend to receive FDI of the vertical variety, which responds more favorably to integration. We also find that the increase in the size of the market associated with regional integration initiatives contributes to attract more FDI to the RIA as a whole. However, only the countries in the RIA that offer a more attractive overall environment for FDI are likely to be winners in this game. Finally, we also find evidence of a small FDI diversion effect. Our results suggest that regional integration, on average, contributes to attracting FDI, but the benefits are unlikely to be distributed evenly.

Keywords: Economic Integration, Foreign Direct Investment

JEL Classification: F15, F21

Suggested Citation

Levy-Yeyati, Eduardo Levy and Stein, Ernesto Hugo and Daude, Christian, Regional Integration and the Location of FDI (July 2003). IADB Research Department Working Paper No. 492, Available at SSRN: https://ssrn.com/abstract=532464

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Ernesto Hugo Stein (Contact Author)

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States

Christian Daude

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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