Regional Economic Integration and Foreign Direct Investment: The Case of Nafta

Zusammenfassung

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The authors examine the impact of NAFTA on FDI into the region and the individual member countries. The literature on FDI and regional economic integration suggests that the implementation of NAFTA makes the entire area a more desirable investment location. However, insofar as individual member countries are concerned, the a priori effects are not necessarily unambiguously positive. They find that the implementation of NAFTA had a generally positive effect on inward FDI into the entire region, with the benefits accruing only to the US and Canada.

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Auszug

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Regional Economic Integration and Foreign Direct Investment: The Case of Nafta

Introduction

Foreign direct investment (FDI) has increased significantly over time, driven by wideranging economic and technological forces (Buckley et al. 2001, Dunning 1998, Anand/Kogut 1997). These forces, however, cannot explain the increase in FDI entirely. "[I]t is also driven by the ongoing liberalization of FDI and trade policies. National policy regimes are converging towards a more welcoming stance on FDI, as competition for investment intensifies" (UNCTAD 2002, p. 3). Countries compete for FDI, and regional economic integration may provide them with additional location-specific advantages that serve to attract it (Ethier 1998). However, not all countries in the integrated region may benefit to the same degree (Dunning 1997, Ethier 1998). In fact, some countries may lose FDI to other partner countries in the regional integration pact. This fear has been expressed in all three member countries of the North American Free Trade Agreement (NAFTA), Canada, Mexico and the United States, which are very directly involved in the competition for investment (e.g., Love/Lage-Hidalgo 1999).

NAFTA came into effect on January 1, 1994. Canada, Mexico, and the United States agreed to eliminate tariffs on 99 percent of internally traded goods by the end of 2004 and significantly liberalize FDI policy (Hejazi/Safarian 2005). Investors from within NAFTA are generally guaranteed equal treatment with domestic investors for most manufacturing and a few service sectors and transparent regulations (see Rugman/Gestrin 1994 for a more detailed description of the treatment of the various sectors in each country). In a...

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