Deep Trade Agreement and Foreign Direct Investments

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