Free Trade Agreements and Foreign Direct Investment: The Role of Endogeneity and Dynamics

This article studies the impact of Free Trade Agreements (FTA) on outbound foreign direct investment (FDI). From one perspective, FTA may promote FDI since FTA aim to promote economic activity between countries. However, lower trade barriers may lower the incentive of firms to conduct FDI. Therefore, the net impact is an empirical question. Using a panel of countries for the years 1990–2006, this article effectively controls for participation in an FTA when analyzing the impact on outbound FDI. The lengthy time series also allows us to examine effectively the dynamic nature of the relationship. Failing to account for endogeneity and dynamics would likely generate inaccurate conclusions regarding the impact of FTA on outbound FDI. Our analysis finds that outbound FDI is either unrelated to participation in an FTA or is negatively affected.