Impact of Regional Blocs on FDI Flows: A Study of Select Asian Blocs

Abstract

Trading blocs are expanding their coverage and spectrum. Hence, along with trade liberalisation, areas such as liberalised domestic policies, strong infrastructure platforms and less stringent structural set-ups are gaining popularity among various newly negotiated trade agreements. With such support, trade blocs are not only contributing towards stimulating trade but also encouraging investment/foreign direct investment (FDI) flows (and stock) among member countries. Further, following the European Union trends, the Asian continent is emerging as a web of trade blocs. This study is an attempt to empirically examine the impact of three trading blocs (ASEAN/APTA/SAARC) on FDI flows and FDI stock over a period of 12 years via a panel regression framework augmented with gravity model specifications. The results for FDI stocks were found to be more captive. The results for ASEAN suggested that members of ASEAN are significantly attracting FDI stock both from intra-bloc and extra-bloc countries. Results for Asia Pacific Trade Agreement (APTA) found that APTA members are attracting FDI stocks from intra-bloc and extra-bloc economies, but the coefficient was not significant. However, the results suggest that SAARC countries still need to work towards attracting FDI stocks from Asian economies.