Gravity Estimations with FDI Bilateral Data: Potential FDI Effects of Deep Preferential Trade Agreements

Abstract

This study employs a structural gravity approach to analyse the impact of preferential trade agreements (PTAs) on bilateral FDI. We use the UNCTAD global database on bilateral FDI stocks and flows. To control for the heterogeneous nature of PTAs we employ three different indicators of PTA depth. We find that ’deeper’ or comprehensive PTAs (e.g. including provisions on investment, public procurement and intellectual property rights provisions) have a significant positive impact on bilateral FDI between partners. For instance, we estimate that the deepest PTA (with an index of seven in the DESTA database) is expected to increase bilateral FDI stocks between signatory countries by around 54%. We also show the importance and policy-relevant information contained in the structurally estimated inward multilateral resistance terms (IMR). We find that strictly domestic policies have a significant impact on the IMR, thus explaining the variation in the national barriers to FDI. As an example, we analyse the potential impact on foreign direct investment of the economic co-operation agreement signed by the Pacific Alliance countries (Chile, Colombia, Mexico, Peru) in 2012.