Estimating Regional Trade Agreement Effects on FDI in an Interdependent World

Recent research on trade and multinationals highlights a novel issue with multinational firms. In particular, their integration strategies are complex and the degree of vertical integration varies in a multilateral world with many possible locations of activity. Multinationals may choose some plants to serve consumers locally only, whereas others engage in trade. Overall, this may explain the fact that a high percentage of world trade is actually controlled by multinational firms, although most of the foreign direct investment (FDI) occurs within the block of developed countries. The most important regional trade agreements (RTAs) are signed beween members of the very same block of economies. This gives rise to the question asked in the present paper: what is the impact of RTAs on FDI in an interdependent world? The paper focuses on the role of the Europe Agreements between the member countries of the European Union and ten Central and Eastern European countries. In doing so, recent spatial HAC estimation techniques are applied to both estimation and testing.

[1]  Bruce A. Blonigen,et al.  Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment , 2002 .

[2]  S. Lael Brainard.  An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade , 1993 .

[3]  Harald Uhlig,et al.  Does a Currency Union affect Trade? The Time Series Evidence Reuven Glick and Andrew K. Rose* , 2002 .

[4]  Harry H. Kelejian,et al.  HAC estimation in a spatial framework , 2007 .

[5]  Timothy G. Conley.  GMM estimation with cross sectional dependence , 1999 .

[6]  Ernesto H. Stein,et al.  Regional Integration and the Location of FDI , 2003 .

[7]  E. Helpman,et al.  Export Versus FDI with Heterogeneous Firms , 2004 .

[8]  Cletus C. Coughlin,et al.  Photo courtesy of The Gateway Arch, St. Louis, MO. www.gatewayarch.comFOREIGN DIRECT INVESTMENTIN CHINA: A SPATIAL ECONOMETRiC STUDY , 1999 .

[9]  S. Yeaple.  The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment , 2003 .

[10]  S. Brakman,et al.  Foreign direct investment and the multinational enterprise , 2008 .

[11]  Eric van Wincoop,et al.  Borders, Trade, and Welfare , 2001 .

[12]  Horst Raff,et al.  Preferential Trade Agreements , 2020, World Scientific Lecture Notes in Economics and Policy.

[13]  Badi H. Baltagi,et al.  Estimating models of complex FDI: Are there third-country effects? , 2007 .

[14]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[15]  J. Bergstrand,et al.  A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises , 2007 .

[16]  K. Head,et al.  Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investment in the United States , 1994 .

[17]  J. Markusen,et al.  The Theory of Endowment, Intra-Industry, and Multinational Trade , 1996 .

[18]  Ronald B. Davies.  Fragmentation of headquarter services and FDI , 2005 .

[19]  J. Markusen,et al.  MULTINATIONALS, MULTI-PLANT ECONOMIES, AND THE GAINS FROM TRADE , 1984, World Scientific Studies in International Economics.

[20]  Harry H. Kelejian,et al.  On the asymptotic distribution of the Moran I test statistic with applications , 2001 .

[21]  Gene M. Grossman,et al.  Optimal Integration Strategies for the Multinational Firm , 2006 .

[22]  Harry H. Kelejian,et al.  A Generalized Moments Estimator for the Autoregressive Parameter in a Spatial Model , 1999 .

[23]  Silvana Tenreyro,et al.  The Log of Gravity , 2004 .

[24]  Elhanan Helpman,et al.  A Simple Theory of International Trade with Multinational Corporations , 1984, Journal of Political Economy.

[25]  A. Kokko,et al.  Regional Integration and Foreign Direct Investment , 1997 .

[26]  James E. Anderson,et al.  Gravity with Gravitas: A Solution to the Border Puzzle , 2001 .

[27]  J. Bergstrand,et al.  Do Free Trade Agreements Actually Increase Members' International Trade? , 2005 .

[28]  Daniel L. Millimet,et al.  Assessing the Pollution Haven Hypothesis in an Interdependent World , 2007 .

[29]  J. Markusen.  Multinational Firms and the Theory of International Trade , 2002 .

[30]  Bruce A. Blonigen,et al.  The Effects of Bilateral Tax Treaties on U.S. FDI Activity , 2000 .

[31]  R. Feenstra.  Advanced international trade : theory and evidence , 2004 .

[32]  H. Kelejian,et al.  Specification and Estimation of Spatial Autoregressive Models with Autoregressive and Heteroskedastic Disturbances , 2008, Journal of econometrics.

[33]  Bruce A. Blonigen,et al.  Spacey Parents: Spatial Autoregressive Patterns in Inbound FDI , 2005 .

[34]  Harry H. Kelejian,et al.  INSTRUMENTAL VARIABLE ESTIMATION OF A SPATIAL AUTOREGRESSIVE MODEL WITH AUTOREGRESSIVE DISTURBANCES: LARGE AND SMALL SAMPLE RESULTS , 2004 .

[35]  Ernesto H. Stein,et al.  The Ftaa and the Location of FDI , 2003 .

[36]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[37]  P. Egger,et al.  Multilateral trade and investment liberalization: effects on welfare and GDP per capita convergence , 2004 .

[38]  Harry Grubert,et al.  Empirical asymmetries in foreign direct investment and taxation , 2004 .