Abstract
AbstractUsing a novel database on multinational production (MP), this article investigates the impact of preferential trade agreements on foreign affiliates’ production activities. We find that trade agreements with investment provisions have a positive effect on MP. On average, signing an agreement including investment provisions is associated with increased MP up to 26% in the manufacturing sector and 34% in the services sector. Our findings suggest that investment provisions increase MP by facilitating multinationals operations in foreign markets, especially for activities requiring the proximity of suppliers and consumers, and by helping multinationals joining global value chains.
Highlights
What is the impact of trade agreements on the activities of multinational enterprises (MNEs)? How does the accession of countries to regional trade agreements affect MNEs’ decision to set up affiliates and produce in global value chains (GVCs)? These crucial questions have not received sufficient attention in the literature on preferential trade agreements (PTAs)
The coefficients suggest that the entry into force of a PTA including an investment provision increases on average multinational production (MP) of goods and services by 36% and 52%, respectively
While the magnitudes decrease when we control for the depth of trade agreements, the coefficient of investment provisions is still sizeable: the entry into force of a PTA including an investment provision increases on average MP of goods and services by 26% and 34%, respectively
Summary
What is the impact of trade agreements on the activities of multinational enterprises (MNEs)? How does the accession of countries to regional trade agreements affect MNEs’ decision to set up affiliates and produce in global value chains (GVCs)? These crucial questions have not received sufficient attention in the literature on preferential trade agreements (PTAs). We provide evidence consistent with the prominent narrative that deep agreements facilitate countries’ participation in GVCs. First, we find that the effect of investment provisions is stronger for foreign affiliates engaged in exporting activities, hinting at a complementary relationship between trade and MP. The combination of trade and investment provisions in PTAs, providing both lower operational costs for foreign affiliates and lower trade costs for their imports and exports, could explain the positive impact of deep agreements.. The effect is stronger for intermediate inputs trade and for trade in services (Lee, 2019; Dhingra et al, 2021) Our article complements this literature by looking at the impact on MP and focusing on the role of PTAs with investment provisions, which are expected to have the most influence on MNEs’ investment and activity abroad.
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