Abstract
CAFTA (China-ASEAN Free Trade Area) has a strong promotion effect on FDI after its formal establishment, including both indirect effects due to trade liberalization and direct effects through investment and investment facilitation. This paper uses World Bank data from 2000-2019 for a quasi-natural experiment established by CAFTA using double differencing and concludes that CAFTA has a significant enhancing effect on FDI, and that the level of economic development, the rate of development, and the degree of trade liberalization of each member country within its free trade area have a significant impact on FDI. Meanwhile, this paper uses heterogeneity test to show that the establishment of CAFTA in countries with clean government and high education level is conducive to the increase of FDI. Countries with low contracting efficiency and high tax share will further improve the system due to the establishment of CAFTA, which is conducive to the further development of FDI.
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