Regional trade agreements and foreign direct investment

Do variations in institutional design influence the inward flows of foreign direct investment (FDI)? The concept that membership in international institutions can affect flows of FDI has only recently been addressed. However, the application of distinctions in the creation of organizations to FDI has been limited. Applying and advancing recent theoretical contentions, I argue that not only is the number of regional trade agreements (RTAs) memberships relevant but the variation in these agreements greatly affects the inflow of foreign direct investment into both developed and developing nations. The variation in RTA economic scope and independence gives foreign investors comparable signals as to the extent in which developing governments will apply liberal economic reforms as well as the ability of external agencies to enforce these reforms and protect investments. Conversely, stringent and strongly independent RTAs may actually prove to be inhibiting to foreign investment in developed countries by restricting the previously successful economic actions. I apply an original data set of FDI inflows for both (105) developing and developed nations from 1970 to 2003. Controlling for alternative explanations and concerns of endogeneity, I find that elevated levels of both RTA economic scope and independence produce superior inflows of FDI into developing nations, while more independent RTAs actually reduce inward FDI movement into developed nations.