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Economic integration and bilateral FDI stocks: the impacts of NAFTA and the EU

Barrell, Ray and Nahhas, Abdulkader (2018) Economic integration and bilateral FDI stocks: the impacts of NAFTA and the EU. CFM Discussion Paper Series (CFM-DP2018-14). Centre For Macroeconomics, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2018 Centre for Macroeconomics
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data
F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade
F - International Economics > F1 - Trade > F15 - Economic Integration
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 05 Oct 2018 14:32
Last Modified: 30 Jan 2019 12:41
URI: http://eprints.lse.ac.uk/id/eprint/90372

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