Is FTA/EPA effective for a developing country to attract FDI?: simulation analysis based on an extended knowledge-capital model

Kazuhiko Oyamada and Uchida Yoko

No 517, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: To prepare an answer to the question of how a developing country can attract FDI, this paper explored the factors and policies that may help bring FDI into a developing country by utilizing an extended version of the knowledge-capital model. With a special focus on the effects of FTAs/EPAs between market countries and developing countries, simulations with the model revealed the following: (1) Although FTA/EPA generally ends to increase FDI to a developing country, the possibility of improving welfare through increased demand for skilled and unskilled labor becomes higher as the size of the country declines; (2) Because the additional implementation of cost-saving policies to reduce firm-type/trade-link specific fixed costs ends to depreciate the price of skilled labor by saving its input, a developing country, which is extremely scarce in skilled labor, is better off avoiding the additional option; (3) If a country hopes to enjoy larger welfare gains with EPA, efforts to increase skilled labor in the country, such as investing in education, may be beneficial.

Keywords: Developing countries; Foreign investments; International trade; International economic integration; Foreign direct investment; Multinational enterprise; Export platform; Free trade agreement; Economic partnership agreement (search for similar items in EconPapers)
JEL-codes: F11 F12 F15 F23 (search for similar items in EconPapers)
Date: 2015-03-01
New Economics Papers: this item is included in nep-int
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 517. 2015-03-01

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