The Political Economy of FDI Flow into Developing Countries: Does the Depth of International Trade Agreements Matter?

Arslan Rana () and Mazen Kebewar

Working Papers from HAL

Abstract: There is considerable debate whether the domestic political institutions (specifically, the country's level of democracy) of the host developing country toward foreign investors are effective in establishing the credibility of commitments are still underway, researchers have also analyzed the effect of international institutions such as (GATT-WTO) membership and Bilateral Investment treaties (BIT) in their role of establishing the credibility of commitment to attract foreign investments. In addition, most recent studies have examined the effect of International Trade Agreements (TAs) on FDI flows as they contain separate investment chapters and dispute settlement mechanism, thus providing confidence to investor regarding the security of their investments. We argue that there are qualitative differences among various types of trade agreements. Full-fledged trade agreements (FTAs-CUs) provide credibility of commitments to foreign investors whereas the partial scope agreements (PSA) are not sufficient in providing credibility. Moreover, the level of democracy in the host country conditions the effect of FTAs-CUs and not in the case of PSAs. This paper analyses the impact of heterogeneous TAs, and their interaction with domestic institutions, on FDI inflows. Statistical analyses for 122 developing countries from 1970 to 2005 support this argument. The method adopted relies on fixed effects estimator which is robust to control endogeneity on a large panel dataset. The strict exogeneity of results by using a method suggested by Baier and Bergstrand (2007) and no feedback effect found in sample. The results state that (1) The conclusion of FTAs-CUs attract FDI inflows into the developing countries significantly whereas PSAs are insignificant (2) FTAs-CUs are complementary to democratic regime whereas the conditional effect of PSA with democracy on levels of FDI inflows is insignificant.

Keywords: Foreign direct investment; free trade agreements; partial scope agreements; domestic institutions. (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-int and nep-pol
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01203686
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Related works:
Working Paper: The Political Economy of FDI flows into Developing Countries: Does the depth of International Trade Agreements Matter? (2014)
Working Paper: The Political Economy of FDI flows into Developing Countries: Does the depth of International Trade Agreements Matter? (2014)
Working Paper: The Political Economy of FDI Flows into Developing Countries: Does the Depth of International Trade Agreements Matter? (2014)
Working Paper: The Political Economy of FDI flows into Developing Countries: Does the depth of International Trade Agreements Matter? (2014)
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