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Deep Trade Agreement and Foreign Direct Investments (English)

Preferential trade agreements are growing in number and deepening in content by incorporating disciplines that go beyond market access. They increasingly encompass non-trade-related disciplines as diverse as intellectual property rights, environment laws, or labor market regulations. Moreover, because investment is complementary to trade, preferential trade agreements provide relevant institutional frameworks to partner countries that wish to regulate their foreign investments. This paper studies the impact of deep trade agreements on foreign direct investment and examines three sub-questions. First, is the impact of trade agreements on foreign direct investment heterogeneous across types of business activity? Second, is this impact heterogeneous across disciplines covered in the agreements? Third, does the level of development of home and host countries matter for this impact? The analysis exploits the World Bank’s data set on the content of preferential trade agreement and data on announcements of bilateral greenfield investment at the activity level. The findings show that deep trade agreements matter for investment: every additional discipline in a preferential trade agreement increases foreign direct investment by 1.4 percent, on average. Deep agreements do not impact foreign direct investment in natural resources and extractive activities and have heterogeneous effects across manufacturing- and services-related activities. The results also reveal that disciplines that go beyond the mandate the World Trade Organization matter more for foreign direct investment. Disciplines related to investment liberalization and protection, intellectual property rights, or migration increase foreign direct investment, whereas disciplines on labor market regulations reduce investment. The results are mostly driven by investment between developed and developing countries.


  • Author

    Laget,Edith, Roch,Nadia, Varela,Gonzalo J.

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    Policy Research Working Paper

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    The World Region,

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  • Doc Name

    Deep Trade Agreement and Foreign Direct Investments

  • Keywords

    foreign direct investment; trade and investment; labor market regulation; preferential trade agreement; International Trade and Investment; Canadian Journal of Economics; general equilibrium trade model; Technical Barriers to Trade; intellectual property rights; movement of capital; bilateral investment treaty; global value chain; regional trade agreement; exchange of good; standard industrial classification; balance of payment; value added trade; state owned enterprise; international trade agreement; impact of trade; trade and fdi; trade in services; trade diversion effect; preferential trading arrangements; reducing trade barriers; department of economics; positive spillover effect; policy variable; freedom of association; reduction of uncertainty; market access rule; international investment position; quality of investment; investment promotion agency; public decision making; Type of Investment; fragmentation of production; terrorism information; high compliance costs; estimate of compliance; transportation service provider; movement of person; environmental law; fixed effect; standard error; competition policy; trade flow; manufacturing activities; asylum laws; deep integration; gravity model; positive impact; robustness check; supply chain; capital policy; extractive activity; greenfield investment; empirical analysis; cultural cooperation; cross-border investment; environmental regulation; trade creation; sample period; missing observation; zero investment; best practice; clear economic; labor discipline; foreign investor; recent work; investment discipline; north-south agreements; destination country; Capital Investments; market datum; time t; Trade Policies; Trade Policy; partner country; international economics; market depth; Property management; positive value; Real estate; consumer electronics; illegal immigration; technology industrial; transportation sector; consumer protection; export platform; empirical work; trade literature; source country; global production; business research; activity classification; golden rule; production network; trade theory; research policy; industrial innovation; Innovation Policies; international reporting; trade datum; reporting obligation; market investment; data reporting; production chain; new job; political dialogue; innovation policy; multiple sources; Economic Policy; human rights; money laundering; company loan; academic research; illicit drug; emerging country; regional cooperation; Data Protection; production activity; executive branch; public awareness; Social Welfare; bargaining power; foreign entity; industry lobby; business environment; outstanding amount; investment climate; environment policy; production process; child labor; producing good; unskilled worker; low-skilled worker; minimum wage; unemployment benefit; political science; exogenous factor; market size; investment barrier; economic geography; multinational corporation; estimation strategy; national policy; estimation technique; local source; Exchange Rates; panel data; factor endowment; potential users; gravity equation; consistent estimate; negative effect; resource sector; innovation effort; data sample; intermediate product; cross-border operation; Natural Resources; foreign capital; cross-border trade; business condition; vertical investments; production structure; investment liberalization; homogenous good; open access; development policy; index base; data availability; Investment Flow; Political Economy; domestic regulation; empirical evidence; Research Support; treaty text; countervailing measure; export tax; investment measure; regulatory gap; legal enforcement; legal language; low skill worker; state aid; low-skill worker; positive relationship; resource extraction; previous work; signatory countries; agricultural good; tariff liberalization



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Laget,Edith Roch,Nadia Varela,Gonzalo J.

Deep Trade Agreement and Foreign Direct Investments (English). Policy Research working paper,no. WPS 9829 Washington, D.C. : World Bank Group.