Foreign Direct Investment, Regional Integration Agreements and Economic Growth.

Griffiths, David James (2007) Foreign Direct Investment, Regional Integration Agreements and Economic Growth. PhD thesis, Lancaster University.

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Abstract

The importance of studying economic growth cannot be overstated. Though it does not guarantee a better standard of living, economic growth offers unrivalled potential to reduce poverty in developing countries and improve the fortunes of those lucky enough to be bom in the developed world. The aim of this thesis is to explore the relationship between three 'open-economy' factors that are believed to strongly influence economic growth: regional integration agreements (RIAs), foreign direct investment (FDI) and trade. We employ the well-known gravity model as the empirical framework in which to analyse the interplay between these three factors. We also conduct a case study analysis of Mexico; this allows us to further explore some of our empirical findings in the context of a developing country that has been heavily influenced by trade, investment, and membership of a regional integration agreement. In addition to evidence that integration agreements stimulate intra-regional investment and trade, our empirical analysis is clear that there are also significant and varied effects on non-member countries. Such effects should not be overlooked by policymakers when assessing the merits of a particular RIA. We also report results which indicate that outward FDI and exports are complements, not substitutes. This suggests that fears that outward investment leads to a loss of employment at home are overblown. There is evidence, however, that the strength of the complementary relationship depends on the characteristics of the countries involved. The case study ably demonstrates the significant influence that integration agreements can have on countries and economies. One of the key impacts of the North American Free Trade Agreement (NAFTA) was simply its ability to legitimise and deepen the liberalisation policies that Mexico had begun to implement some years before. It is also evident, however, that NAFTA has induced serious spatial effects on the Mexican economy. Such effects may have contributed to income inequality and again highlight that policymakers must be aware that integration agreements can have profound, unintended effects on both member and non-member countries.