Regional trade agreement and foreign direct investment

This paper investigates the relationship between regional trade agreements, such as the NAFTA, and FDI. Using a fixed-effects gravity model to estimate OECD panel data spanning 1982–1997, we learn that trade integration encourages FDI. We find specific evidence for each of the NAFTA member countries—Mexico, Canada and the United States. In addition, we find evidence that FDI will rise with host and parent country GDP and fall with distance.