REFORM CREATING REGIONAL TRADE AGREEMENTS AND FOREIGN DIRECT INVESTMENT: APPLICATIONS FOR EAST ASIA

Abstract

We estimate the investment creation and diversion effects of RTAs by using an extended gravity equation focusing on domestic reform as a commitment device for RTA membership. As a case study, we estimate the impact of proposed East Asian RTAs on inward FDI. We find that: (i) reform creating RTA membership, larger market size, better skilled labour and lower trade costs all contribute positively and significantly to inward FDI; and (ii) most of the proposed East Asian RTAs promote intra-bloc FDI. In particular, both South-North and North-North RTAs prove to be more preferable membership combinations to South-South RTAs in East Asia.