The 'New Regionalism': Integration as a Commitment Device for Developing Countries

Andreas Waldkirch ()

International Trade from EconWPA

Abstract: Increasingly, developing countries embrace foreign direct investment (FDI) and simultaneously pursue economic integration with developed countries. Foreign investment is subject to sovereign risk and free trade agreements may serve as a commitment mechanism in order to achieve higher sustainable levels of FDI. This paper shows that such agreements, by inducing sunk investments in expanding export sectors, can indeed increase the level of self-enforcing FDI. While one might expect FDI from any source to increase, the analysis shows that this need not be true for FDI originating in non-partner countries even though export- platform type FDI will rise. The reason is the offsetting effect from trade diversion, which diminishes the ability to retaliate should a host country renege on its ex ante commitment to a foreign investor. The choice of partner is thus crucial for a country's ability to attract FDI through economic integration.

Keywords: Foreign Direct Investment; Economic Integration; Commitment (search for similar items in EconPapers)
JEL-codes: F15 F21 O19 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-sea
Date: 2004-12-07
Note: Type of Document - pdf; pages: 33. pdf-file, 33 pages
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpit:0412004

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