Relationship between Preferential Trade Agreements and Foreign Direct Investment: Evidence from a Panel of 147 Countries

ABSTRACT

This study examines the impact of preferential trade agreements (PTAs) on the inflows of foreign direct investment (FDI). Empirical results suggest that FDI gains of preferential trade are increasing with the market size of the preferential trading partners but not due to their economic and geographic closeness to the host country. It is also observed that the association between PTAs and inflows of FDI only exists for middle- and high-income countries, whereas this relationship disappeared for low-income countries. This study recommends that countries should offer various trade related benefits to overseas investors in order to attract higher inflows of capital.

KEYWORDS:

• Foreign direct investment
• preferential trade agreements
• feasible generalized least squares

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

¹ A list of PTAs considered in this analysis can be found in Table A1 in the online appendix.

² See Table A2 for the list of countries.

³ The appendix can be found online at www.tandfonline.com/uitj.