Effects on China and ASEAN of the ASEAN-China FTA: The FDI perspective

The ASEAN-China FTA (ACFTA) is a significant step in regional economic integration for both China and the ASEAN countries. While analysis of the effects of Free Trade Agreements (FTAs) most commonly focuses on the trade effects, the closeness of the link between trade and investment implies that the...

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Bibliographic Details
Published in:Journal of Asian economics 2016-06, Vol.44, p.1-19
Main Authors: Li, Qiaomin, Scollay, Robert, Maani, Sholeh
Format: Article
Language:English
Subjects:
ACFTA
ASEAN
China
Econometrics
Economics
Foreign direct investment
Foreign investment
Free trade
Impact analysis
International economic relations
International finance
Studies
Trade agreements
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Summary:The ASEAN-China FTA (ACFTA) is a significant step in regional economic integration for both China and the ASEAN countries. While analysis of the effects of Free Trade Agreements (FTAs) most commonly focuses on the trade effects, the closeness of the link between trade and investment implies that the effect of an FTA on foreign direct investment (FDI) is also potentially significant. FTAs may stimulate FDI through the effects of market expansion and vertical fragmentation, while they may also reduce FDI through a plant rationalization effect. The overall effect of an FTA on FDI flows is an empirical question. This paper examines the impact of ACFTA on FDI flows through an econometric model that captures the influence of East Asian production networks on FDI, which we expect to be an important explanatory factor. The model finds that ACFTA has a significant and positive effect on FDI flows. A brief survey of the theoretical literature on the welfare and other related effects of FDI serves to emphasize that the extent to which individual member countries of the ACFTA will benefit from this increase in FDI will depend in important ways on the policies pursued in each country.
ISSN:1049-0078
1873-7927
DOI:10.1016/j.asieco.2016.05.001