New Horizons in International Business series
Edited by Lorraine Eden and Wendy Dobson
Chapter 9: How do Regional Trade Agreements Affect Intra-Regional and Inter-Regional FDI?
9. How do regional trade agreements aﬀect intra-regional and inter-regional FDI? Walid Hejazi and Peter H. Pauly INTRODUCTION Regional trade agreements (RTAs) in general and free trade agreements (FTAs) in particular reduce to varying degrees restrictions on trade in goods, services and the movements of capital, labour and other factors among member countries. In the context of trade, the impacts of such agreements are classiﬁed into trade creation and trade diversion. That is, as a result of an FTA, there is predicted to be an increase in bilateral trade ﬂows among members. There is also expected to be trade diversion away from lower cost imports from outsiders to higher cost inside providers who are able to compete against outsiders only because of the preferential access they have to the free trade area. Of course, these eﬀects are oﬀset in a dynamic framework: as growth rates inside the free trade area increase, there is increased demand for imports from all trading partners. Although the predicted impacts on trade of an FTA are relatively well understood, this is not the case for foreign direct investment (FDI). This has to do with the complexity involved in the strategies implemented by multinational enterprises (MNE) as well as the dependence of these strategies on the nature of the economies and industries involved. The immediate impact of an FTA is to reduce the cost of undertaking trade among members. As a result, MNEs operating inside the area may adjust the way in...
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