The Impact of the Regional Trade Agreements on Inflow of Mexican Foreign Direct Investment: An Empirical Approach

Abstract

This article aims to empirically evaluate, based on the annual time series from 1970 to 2018, the hypothesis that regional trade agreements (RTA) had a positive impact on the Mexican Foreign Direct Investment (FDI) inflow in this period. We use the North American Free Trade Agreement (NAFTA) to evaluate its impact in Mexico, which entered into force in 1994. In this context, our interest variable is the dummy d_1994, where from 1994 to 2018 it is equal to 1. We tested several empirical approaches based on ARDL models, robust least-squares methods as well as GMM methods. We also use Granger causality tests and impulse response tests based on the VAR system. All empirical models show that the estimated coefficient from the dummy variable, d_1994, is statistically significant and presents a positive sign. Moreover, the causality tests show that the variable d_1994 granger causes FDI as a proportion of GDP, and the impulse response tests validate the tested hypothesis as well.