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Estimating Regional Trade Agreement Effects on FDI in an Interdependent World

Badi Baltagi (), Peter Egger () and Michael Pfaffermayr ()

No 100, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

Abstract: Recent research on trade and multinationals highlights a novel issue with multinational firms. In particular, their integration strategies are complex and the degree of vertical integration varies in a multilateral world with many possible locations of activity. Multinationals may choose some plants to serve consumers locally only, whereas others engage in trade. Overall, this may explain the fact that a high percentage of world trade is actually controlled by multinational firms, although most of the foreign direct investment (FDI) occurs within the block of developed countries. The most important regional trade agreements (RTAs) are signed beween members of the very same block of economies. This gives rise to the question asked in the present paper: what is the impact of RTAs on FDI in an interdependent world? The paper focuses on the role of the Europe Agreements between the member countries of the European Union and ten Central and Eastern European countries. In doing so, recent spatial HAC estimation techniques are applied to both estimation and testing.

Keywords: Regional trade agreements; Multinational firms; Spatial econometrics; Generalized moments (GM) estimators (search for similar items in EconPapers)
JEL-codes: C23 F14 F15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-tra
Date: 2007-12
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