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

Author

Listed:
  • Ray Barrell

    (Centre for Macroeconomics (CFM)
    Brunel University London
    London School of Economics and Political Science (LSE))

  • Abdulkader Nahhas

    (Brunel University London
    Derby University)

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.

Suggested Citation

  • Ray Barrell & Abdulkader Nahhas, 2018. "Economic Integration and Bilateral FDI stocks: the impacts of NAFTA and the EU," Discussion Papers 1814, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1814
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    More about this item

    Keywords

    Regional trade agreements; Multinational firms; Foreign direct investment; Generalised method of moments; Gravity equation; Dynamic panel data model;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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