Investment Effects of Preferential Trade Agreements: Quality Matters

Boris Taganov and Georgy Idrisov

Journal of the New Economic Association, 2016, vol. 31, issue 3, 40-65

Abstract: We develop a theoretical model of international capital movement in form of FDI. Our theoretical model describes non-linear impact of heterogeneous preferential trade agreements (PTAs) on FDI. In order to quantify PTAs heterogeneity we develop a methodology of PTAs classification. Using the methodology, we quantified a quality of more than 200 PTAs (out of 380 existing globally). Our model predicts that impact of PTA on FDI will depend on observed quality of PTA while marginal investment effect of PTAs will decrease with PTAs' quality improvement. Empirically, we show that use of simple dummy for PTAs without taking into account PTAs heterogeneity and the non-linear effects of PTA on FDI overestimate the investment effects of PTAs up to 100%. Bilateral PTAs within CIS insignificantly affects FDI between countries - maximum investment effects of such agreements are estimated at 19%. Multilateral PTAs have a significant investment effects: FDI between signatories of multilateral PTAs rose up to 71%.

Keywords: foreign direct investment; preferential trade agreements; estimation of investment effects of integration; mathematical modelling (search for similar items in EconPapers)
JEL-codes: F14 F15 F21 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:nea:journl:y:2016:i:31:p:40-65

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