Gravity Estimations with FDI Bilateral Data: Potential FDI Effects of Deep Preferential Trade Agreements

Abstract

This study employs a structural gravity model to analyse the impact of preferential trade agreements (PTAs) on bilateral foreign direct investment (FDI). We use the UNCTAD global database on bilateral FDI stocks and flows. To control for the heterogenous nature of PTAs, we employ two different indicators of PTA depth. We find that ’deeper’ or comprehensive PTAs (e.g. including provisions on investment, public procurement and intel- lectual property rights provision) have a significant positive impact on bilateral FDI between partners. The deepest PTA is expected to increase bilateral FDI stocks between signatory countries by around 54%. As an example, we analyse the potential impact on foreign direct investment of the economic co-operation agreement signed by the Pacific Alliance countries (Chile, Colombia, Mexico, Peru) in 2012.