Do Trade and Investment Agreements Promote Foreign Direct Investment within Latin America? Evidence from a Structural Gravity Model

Marta Bengoa,Blanca Sanchez-Robles,Yochanan Shachmurove

doi:10.3390/math8111882

Abstract

Latin America has experienced a surge in foreign direct investment (FDI) in the last two decades, in parallel with the ratification of major regional trade agreements (RTAs) and bilateral investment treaties (BITs). This paper uses the latest developments in the structural gravity model theory to study if the co-existence of BITs and two major regional agreements, Mercosur and the Latin American Integration Association (ALADI), exerts enhancing or overlapping effects on FDI for eleven countries in Latin America over the period 1995–2018. The study is novel as it accounts for variations in the degree of investment protection across BITs within Latin America by computing a quality index of BITs. It also explores the nature of interactions (enhancing/overlapping effects) between RTAs and BITs. The findings reveal that belonging to a well-established regional trade agreement, such as Mercosur, is significantly more effective than BITs in fostering intra-regional FDI. Phasing-in effects are large and significant and there is evidence of enhancing effects. Results within the bloc are heterogeneous: BITs exert a positive, but small effect, for middle income countries. However, BITs are not effective in attracting FDI in the case of middle to low income countries, unless these countries ratify BITs with a high degree of investment protection.

Highlights

Foreign Direct Investment (FDI) into and across Latin America has experienced a dynamic performance in the last few decades
This paper addresses the following questions: What is the relative importance of regional trade agreements (RTAs) versus bilateral investment treaties (BITs) as a way of attracting FDI? Do effects differ depending on the nature of the BITs and the presence of other agreements? Do they complement or substitute for economic and political institutions? There is substantial controversy in the empirical literature about these matters
BITs are effective in fostering intra-regional FDI in Latin America when there is a sizeable degree of institutional development in the host country or a high degree of investment protection entailed by the treaty

Summary

Introduction

Foreign Direct Investment (FDI) into and across Latin America has experienced a dynamic performance in the last few decades. Many countries in the area have taken part in regional trade agreements (RTAs) and bilateral investment treaties (BITs). BITs are effective in fostering intra-regional FDI in Latin America when there is a sizeable degree of institutional development in the host country or a high degree of investment protection entailed by the treaty. A particular case is the export-platform strategy [21]: companies set up a plant in a country belonging to a trade bloc in order to improve their access to other markets in the bloc In these instances, net effects of trade integration are more nuanced and non-predictable a priori, since they depend on the relative importance and complex relationships between horizontal and vertical integration patterns within the firms.

Bilateral Investment Treaties and Foreign Direct Investment

Theoretical Framework

Descriptive Analysis

Empirical Strategy

Empirical Results

Concluding Remarks