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A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: Did Canada Benefit From the Free Trade Agreements with the United States?

Author

Listed:
  • Peter J. Buckley

    (Leeds University Business School)

  • Jeremy Clegg

    (Leeds University Business School)

  • Nicolas Forsans

    (Leeds University Business School)

  • Kevin T. Reilly

    (Leeds University Business School)

Abstract

This paper asks a simple question: Did Wilfred Laurier’s dream of free trade with the United States, when it came to fruition in 1989, also have a benefit by increasing foreign direct investment (FDI) into Canada by US multinationals? This paper introduces a dynamic framework, rather than the literature’s traditional static framework, and uses a structural break framework, rather than modelling policy changes as an intercept shift alone. Its conclusions are (a) The signing of the free trade agreements between Canada and the United States increased the responsiveness of growth in the Canadian economy on the US FDI decision by a factor of two. (b) Limited dynamics are found in the form of lagged effect of changes in the real Canadian interest rate. (c) The effect of the change in the exchange rate is static and constant over the whole 1955 to 2000 period and was unaffected by the introduction of free trade between the United States and Canada.

Suggested Citation

  • Peter J. Buckley & Jeremy Clegg & Nicolas Forsans & Kevin T. Reilly, 2004. "A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: Did Canada Benefit From the Free Trade Agreements with the United States?," International Finance 0407001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0407001
    Note: Type of Document - doc; pages: 53. In the context of US-Canada Free Trade agreement proposes two empirical innovations in the modelling of foreign investment.
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    References listed on IDEAS

    as
    1. Klein, Michael W. & Rosengren, Eric, 1994. "The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects," Journal of International Economics, Elsevier, vol. 36(3-4), pages 373-389, May.
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    3. repec:nsr:niesrd:43 is not listed on IDEAS
    4. Jeremy Clegg & Nicolas Forsans & Kevin T. Reilly, 2004. "Evolution of FDI in the United States in the Context of Trade Liberalization and Regionalization," Palgrave Macmillan Books, in: The Challenge of International Business, chapter 10, pages 189-197, Palgrave Macmillan.
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    Cited by:

    1. Dorothee J. Feils & Manzur Rahman, 2008. "Regional economic integration and foreign direct investment: The case of NAFTA," Management International Review, Springer, vol. 48(2), pages 147-163, April.
    2. de Boyrie Maria E, 2010. "Structural Changes, Causality, and Foreign Direct Investments: Evidence from the Asian Crises of 1997," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-40, January.

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    More about this item

    Keywords

    Foreign Direct Investment; Distributed Lag Model; Policy as Structural Break.;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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