Regional integration agreements and foreign direct investment: Theory and preliminary evidence

In this paper we investigate the effects which economic integration exerts upon the magnitude and character of foreign direct investment (FDI) flows. Drawing upon the existing literature on trade flows we investigate the impact of regional integration agreements (RIAs) on FDI flows and analyse their welfare implications. An empirical investigation of some 381 bilateral FDI flows in 1995 is presented, the results of which suggest, in broad terms, that it is not the presence of RIAs that determines the magnitude and direction of bilateral FDI flows but rather the economic characteristics of both the investing and the host country.