The effects of regional trade agreements on FDI by its origin and type: Evidence from U.S. multinational enterprises activities

- The effects of RTAs on FDI depend on both the origin and type of FDI.
- I use data on the sales destinations of foreign subsidiaries of U.S. MNEs.
- RTAs reduce intra-RTA horizontal FDI but increase extra-RTA export-platform FDI.
- The overall effects of RTAs are positive only for extra-RTA FDI.
- The results support economies of scale of integrated markets.

The effects of regional trade agreements (RTAs) on foreign direct investment (FDI) depend on both the origin and type of FDI. To estimate the various effects of RTAs, I differentiate between various types of FDI by using data on the sales destinations of foreign subsidiaries of U.S. multinational enterprises (MNEs), while also addressing the endogeneity of RTA formation. Consistent with the theory of MNEs, I find that RTAs reduce horizontal FDI from intra-RTA countries and increase export-platform and total FDI from extra-RTA countries. Moreover, the overall effects of RTAs are positive for extra-RTA FDI, but inconclusive for intra-RTA FDI. The results also support the effect of integrated markets' economies of scale in inducing extra-RTA FDI.