Regional Integration and Foreign Direct Investment: A Conceptual Framework and Three Cases

Abstract

How regional investment agreements affect the flows of foreign direct investment depends on location, the competitiveness of local firms, the motives for investment, and how the agreement affects the policy environment.

Blomström and Kokko discuss how regional investment agreements may affect the inward and outward flows of foreign direct investments in the integrating region. After describing the multidimensional character of the issue, they provide a conceptual framework for analysis as well as three case studies focused on different kinds of regional integration:

North-North integration (Canada joining the CUSFTA).

North-South integration (Mexico`s accession to the NAFTA).

South-South integration (MERCOSUR).

They conclude that the response to an integration agreement will, in each case, depend on the environmental change brought about by the regional investment agreements, the locational advantage of the country or region, the competitiveness of local firms in the integrating region, and the motives for foreign direct investment in and by the country or region in question.

The creation of the Canada-U.S. Free Trade Agreement (CUSFTA), for example, had relatively little influence on direct investment patterns in Canada, since much of the trade between Canada and the United States had been liberalized long before the CUSFTA was established. By contrast, the Mexican accession to the NAFTA brought about significant policy changes, which help to explain foreign multinationals' increasing interest in the country. Similarly, the establishment of the MERCOSUR Common Market is likely to significantly affect the region's policy environment, which suggests that it may have a notable (although varying) impact on foreign direct investment in the four member countries.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to study regionalism and development.