The Impact of EU Preferential Trade Agreements on Foreign Direct Investment


  • The authors acknowledge financial support from the Italian Ministry of Education, University and Research (Scientific Research Program of National Relevance 2007 on ‘European Union policies, economic and trade integration processes and WTO negotiations’– PUE & PIEC). The authors thank the two anonymous referees, Francesco Aiello, Giovanni Anania, Luca De Benedictis, Alessia Lo Turco and participants at the III Workshop of the PUE&PIEC research project held in Treia on 2–4 February 2010 for their valuable comments on an earlier draft of this manuscript. They are also grateful to the participants at the 51st Annual Conference of Italian Economic Society (SIE) held in Catania on 15–16 October 2010, the XII European Trade Study Group (ETSG) annual conference held in Lausanne on 9–11 September 2010, the Italian Trade Study Group (ITSG) Conference on ‘Regional Economic Integration and Competitiveness’ held in Reggio Calabria on 1–2 July 2010.


Although North–South preferential trade agreements (PTAs) are expected to affect foreign direct investment (FDI), there is not much evidence to date on the impact of EU PTAs on the pattern of FDI. The aim of this study is to assess the impact of EU PTAs on the outward stocks of FDI of the EU. We estimate a model based on the knowledge-capital theory of the multinational enterprise over the period 1995–2005 using a sample of 173 host countries. Explanatory variables include measures of the level of bilateral protection and a dummy to capture the impact of deep integration provisions of PTAs. A dynamic panel model with fixed effects is used in order to take into account the dynamic behaviour of FDI and the heterogeneity bias. Results show that EU FDI is both horizontal and vertical. The level of EU protection affects FDI negatively, while the impact of the tariffs applied by host countries varies across groups of partner countries. Deep integration provisions affect EU FDI positively.