Do regional trade agreements stimulate FDI? Evidence for the Agadir, MERCOSUR and AFTA regions

• DOI: http://doi.org/10.1111/rode.12381
• Date: 01 August 2018
• Author: Christian Dreger,Mondher Cherif
• Published date: 01 August 2018

REGULAR ARTICLE

Do regional trade agreements stimulate FDI?

Evidence for the Agadir, MERCOSUR and AFTA

regions

Mondher Cherif

1

|

Christian Dreger

2

1

Universit

e de Reims Champagne-

Ardenne, France

2

Deutsches Institut f€

ur

Wirtschaftsforschung (DIW), Berlin,

Germany

Correspondence

Christian Dreger, DIW Berlin

Mohrenstrasse. 58, 10117 Berlin,

Germany.

Email: cdreger@diw.de

Abstract

The integration of emerging markets into the global econ-

omy is heavily promoted by foreign direct investment

(FDI) inflows. Among the factors explaining the location

of FDI, regional trade agreements (RTAs) can be relevant

for emerging markets, as they can promote economic

integration and increase the attractiveness of the region

for foreign investors. This paper investigates the impact

of South–South trade agreements on the FDI decision of

multinationals, where the Agadir, mercado comun del sur

(MERCOSUR), and ASEAN free trade area (AFTA)

agreements are considered. Three panels of countries are

defined, where the members joined a specific agreement

or not. Non-Gulf Arab states are compared to better per-

forming regions in Latin America and Southern and East-

ern Asia. The analysis provides evidence that openness to

foreign trade and financial markets are among the main

catalysts to attract FDI, provided that business-friendly

institutions exist in the host country. Other variables, like

the size of the industrial sector, urbanization rates, and

external debt appear to be important in some cases. The

integration of China into the world economy is a specific

trigger for FDI to Asian destinations. Since RTAs influ-

ence the market size by reducing barriers to trade, their

impact operates via GDP growth and openness. Gains

from the agreement are striking for Latin America and

Asia, but not for Arab states. To attract more FDI,

DOI: 10.1111/rode.12381

Rev Dev Econ. 2018;22:1263–1277. wileyonlinelibrary.com/journal/rode ©2018 John Wiley & Sons Ltd

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