North-South Integration and the Location of Foreign Direct Investment

38 Pages Posted: 22 Mar 2006 Last revised: 1 Apr 2008

See all articles by Ayça Tekin-Koru

Ayça Tekin-Koru

TED University

Andreas Waldkirch

Colby College - Department of Economics

Date Written: 1/24/2008

Abstract

We investigate how North-South Integration affects the location of FDI between the two regions. The theoretical analysis suggests that integration affects the incentives of partner and non-partner Northern countries to locate in the South differently and may lead to investment diversion from the Northern partner. We test our propositions using data from the North American Free Trade Agreement (NAFTA), the first major North-South integration scheme. Using the largest possible control group, we use a difference-in-differences estimator to find that NAFTA partner FDI in Mexico has increased since the inception of NAFTA above what is implied by other determinants of FDI and the global upward trend during this time. Other countries have not increased their use of Mexico as an export platform. We also find no evidence that inward U.S. FDI has been diverted. The results are robust to a number of different model and econometric specifications as well as the skill data used.

Keywords: Foreign Direct Investment, Multinationals, Export Platform, NAFTA

JEL Classification: F15, F21, F23

Suggested Citation

Tekin-Koru, Ayca and Waldkirch, Andreas, North-South Integration and the Location of Foreign Direct Investment (1/24/2008). Available at SSRN: https://ssrn.com/abstract=890760 or http://dx.doi.org/10.2139/ssrn.890760

Ayca Tekin-Koru (Contact Author)

TED University ( email )

Department of Business Administration
Ziya Gokalp Bulvari No: 48
Ankara, 06420
Turkey
+90 312 535 0034 (Phone)

Andreas Waldkirch

Colby College - Department of Economics ( email )

Waterville, ME 04901
United States
207-859-5244 (Phone)
207-859-5229 (Fax)

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