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Economic Integration and Bilateral FDI stocks: the impacts of NAFTA and the EU

Ray Barrell () and Abdulkader Nahhas
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Ray Barrell: Centre for Macroeconomics (CFM)
Abdulkader Nahhas: Brunel University London

No 1814, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This paper examines the factors affecting bilateral Foreign Direct Investment (FDI) stocks from 14 high income countries to 31 OECD countries over the period 1995-2015. We specifically emphasise the effect of regional trade agreements such as the European Union (EU) and the North American Free Trade Area (NAFTA) along with membership of the Currency Union. Our empirical analysis applies the generalised method of moments (GMM) estimator to a gravity model of bilateral FDI stocks. The findings imply that EU membership is a significant determinant of FDI even when we condition on the variables that follow from the application of the gravity model. We look at the effects of the North American Free Trade Area on within block FDI and find no similar effect. Our results suggest that European Integration has a large effect on FDI stocks, raising intra Single Market FDI noticeably. We note that the UK’s departure from the Single Market may reduce the stock of intra EU FDI by up to 30 per cent in the long run. In addition, the findings point that the UK has no labour market or competitive environment advantage above the rest of the EU in attracting FDI.

Keywords: Regional trade agreements; Multinational firms; Foreign direct investment; Generalised method of moments; Gravity equation; Dynamic panel data model (search for similar items in EconPapers)
JEL-codes: F14 F15 F21 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-int
Date: 2018-05
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