NAFTA and Flow of FDI into Mexico: Investment Diversion or Stock Adjustment?

Abstract

While the investment creationeffect of regional integration agreements has attracted increased attention in recent years, few studies have examined the impact on investment flows to nonmember countries. This paper investigates ***whether evidence exists for diversion of FDI from Latin America to Mexico both before and after NAFTA to examinethe*** impact of regional integration agreements (RIAs) on FDI inflow by conducting simulations based on a gravity model. A cursory observation of recent FDI trends might give rise to such claims of diversion. Over the post-NAFTA period as a whole, this paper finds that Mexico's FDI performance was not significantly different from the Latin American norm. The findings lead us to conclude that there is no evidence of FDI diversion between these two regions. The fact that stock adjustment is completed in Mexico may be one of the reasons that Mexico has not shown expected FDI inflow ratios.