How Trade and Investment Agreements Affect Bilateral Foreign Direct Investment: Results from a Structural Gravity Model

Kox, Henk L.M. and Rojas-Romagosa, Hugo (2020): How Trade and Investment Agreements Affect Bilateral Foreign Direct Investment: Results from a Structural Gravity Model.

Abstract

The paper develops a new stand-alone structural gravity model for explaining bilateral FDI patterns. We employ the model to analyse the impact of preferential trade agreements (PTAs), bilateral investment treaties (BITs) and other policies on bilateral foreign direct investment (FDI). We use the UNCTAD global database on bilateral FDI stocks and flows. To control for the heterogeneous nature of PTAs, we employ two different indicators of PTA depth. We find that on average signing a PTA increases bilateral FDI stocks by around 30%. Nevertheless, we also find that ‘deeper’ or comprehensive PTAs (e.g., including provisions on investment, public procurement and intellectual property rights provisions) do not have a significantly different impact than signing regular PTAs. Belonging to the EU single market, on the other hand, has a strong impact and increases bilateral FDI by around 135%, and signing a BIT has an effect that is comparable to signing a PTA.

• Item Type: MPRA Paper
• Language: English
• Keywords: bilateral FDI, depth of preferential trade agreements, bilateral investment treaties, structural gravity model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C54 - Quantitative Policy Modeling; F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements

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