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The 'New Regionalism': Integration as a Commitment Device for Developing Countries

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  • Andreas Waldkirch

    (Oregon State University)

Abstract

Increasingly, developing countries embrace foreign direct investment (FDI) and simultaneously pursue economic integration with developed countries. Foreign investment is subject to sovereign risk and free trade agreements may serve as a commitment mechanism in order to achieve higher sustainable levels of FDI. This paper shows that such agreements, by inducing sunk investments in expanding export sectors, can indeed increase the level of self-enforcing FDI. While one might expect FDI from any source to increase, the analysis shows that this need not be true for FDI originating in non-partner countries even though export- platform type FDI will rise. The reason is the offsetting effect from trade diversion, which diminishes the ability to retaliate should a host country renege on its ex ante commitment to a foreign investor. The choice of partner is thus crucial for a country's ability to attract FDI through economic integration.

Suggested Citation

  • Andreas Waldkirch, 2004. "The 'New Regionalism': Integration as a Commitment Device for Developing Countries," International Trade 0412004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpit:0412004
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    Cited by:

    1. Innwon Park & Soonchan Park, 2008. "Reform Creating Regional Trade Agreements And Foreign Direct Investment: Applications For East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(5), pages 550-566, December.
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    3. Tekin-Koru, Ayca & Waldkirch, Andreas, 2007. "North American Integration and the Location of Foreign Direct Investment," MPRA Paper 5212, University Library of Munich, Germany.
    4. Ricardo Ernesto Buitrago R., 2008. "Free Trade Agreements and their impact on Latin American migrations: An approach," Revista Equidad y Desarrollo, Universidad de la Salle, June.

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    More about this item

    Keywords

    Foreign Direct Investment; Economic Integration; Commitment;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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