Regional Economic Integration and Geographic Concentration of Multinational Firms

Abstract

A number of theoretical studies have predicted that preferential trade agreements (PTAs) raise outside multinationalsí incentive to invest in the participating countries, especially in those that are integrated with larger markets and have lower production costs. The hypothesis has however not been tested empirically. This paper addresses the issue by estimating the impact of PTAs on countriesí ability to attract multinationals. The evidence is broadly consistent with expectations. The formation of PTAs leads to an increase in FDI by outside multinationals, but the e§ect varies sharply with the size of integrated markets and countriesí comparative advantage. Countries integrated with larger markets experience a greater increase in total and export-platform FDI. Those with a higher labor endowment also attract more FDI especially in labor-intensive industries, but at the expense of their labor-scarce PTA partners.regional economic integration, multinational Örms, geographic concentration, market potential, comparative advantage