Regional integration and bilateral FDI stocks in the OECD

Abstract

AbstractWe examine factors affecting OECD bilateral Foreign Direct Investment (FDI) stocks over 1995–2016. We emphasize the effect of regional trade agreements, the European Union (EU) and the North American Free Trade Area (NAFTA). We find that EU membership is a significant determinant of FDI even when we condition on other gravity variables. The importance of robust economic institutions and freedoms is discussed, with implications for countries that are reducing such freedoms. European Integration has raised intra Single Market FDI by over 40%. The UK has no labour market or competitive environment advantage above the rest of the EU in attracting FDI, and it will lose stocks after departure. We show that distance matters, but the effect is declining slowly.