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Evaluating the Impact of FTAs on FDI: A Text-Based Approach

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  • Dadkhah, Ali
  • Ciuriak, Dan

Abstract

The empirical literature on the impact of bilateral investment treaties (BITs) on foreign direct investment (FDI) has generally concluded that there this is no identifiable impact. We consider the latter issue by adopting a text-based approach to evaluate the liberalization impact of the FTAs on FDI flows for the full range of goods and services sectors. In particular, we map the legal commitments in FTAs onto an index that measures liberalization of FDI based on the OECD’s FDI Regulatory Restrictiveness Index (FDIR), but drawing on the mode 3 component of the OECD’s Services Trade Restrictiveness Index (STRI) to enable greater granularity of treatment of the measures in FTAs. The modified index, which we label the FDI-RI to distinguish it from the FDIR, has the same broad policy areas and the same weighting scheme as the FDIR but the measures under each horizontal policy area (i.e., policies that apply to FDI in general without distinguishing sectors) that are covered in more detail by the STRI have been disaggregated into measures that correspond to those in the STRI. Importantly, we take into account the impact of FTA measures in improving upon each party’s bindings under the General Agreement on Trade in Services (GATS). To translate the text of FTAs into changes in the FDI-RI, first, a general template is created. This way we can calculate an FDI-RI policy shock based on the negotiated text of the FTA. After working out the impact of the FTA on each negotiating party’s template, the final answers are plugged into the OECD Simulator and the final score is calculated for FDI-RI. We combine the shock to the applied measures and the bindings by assigning a weight of 0.5 to the bindings. This generates a shock to the composite non-tariff barriers that consist of applied measures and the uncertainty facing firms that is implicit in the fact that countries have not bound commitments fully and thus can become more restrictive in the future.

Suggested Citation

  • Dadkhah, Ali & Ciuriak, Dan, 2018. "Evaluating the Impact of FTAs on FDI: A Text-Based Approach," Conference papers 332959, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332959
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    References listed on IDEAS

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    1. Kazuhiro Sugie & Massimo Geloso Grosso & Hildegunn Kyvik Nordås & Sébastien Miroudot & Frédéric Gonzales & Dorothée Rouzet, 2015. "Services Trade Restrictiveness Index (STRI): Logistics Services," OECD Trade Policy Papers 183, OECD Publishing.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    4. Massimo Geloso Grosso & Frédéric Gonzales & Sébastien Miroudot & Hildegunn Kyvik Nordås & Dorothée Rouzet & Asako Ueno, 2015. "Services Trade Restrictiveness Index (STRI): Scoring and Weighting Methodology," OECD Trade Policy Papers 177, OECD Publishing.
    5. Sébastien Miroudot & Kätlin Pertel, 2015. "Water in the GATS: Methodology and Results," OECD Trade Policy Papers 185, OECD Publishing.
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