THE NEXUS AMONG FOREIGN DIRECT INVESTMENT (FDI), TRADE AGREEMENTS (RTAs) AND BILATERAL TRADE: EMPIRICAL EVIDENCE FROM ECOWAS, NAFTA, EU AND ASEAN REGIONS

Abstract

This paper examines how foreign direct investment (FDI) and trade agreements interact to affect bilateral trade in manufacturing industry. Trade agreements and FDI have been increasing throughout the world. Most of the studies focus on whether trade agreements are trade creating or diverting. The fact that trade agreements interact with other factors such as FDI, outsourcing, etc to affect trade get little attention. This paper addresses this issue using ECOWAS, NAFTA, EU, ASEAN, and the rest of the world (ROW) from 1996-2004 for 28 manufacturing industries and uses fixed effects and random effects estimation methods in a gravity model framework. Exporter and importer GDP are significant and positively related with bilateral trade, international distance between exporter and importer country negatively and significantly affect bilateral trade, speaking the same language and sharing the same border significantly increases bilateral trade. Foreign direct investment inflows drive trade among NAFTA, EU, ASEAN, ECOWAS and the ROW countries. Interaction terms are used to isolate the combined effects of FDI and trade agreements on bilateral trade. The intracbloc interaction with FDI generally diverts trade in almost all the regions significantly.