Trading blocs and Foreign Direct Investment: endogenous coalition structure in the presence of FDI. 

Hyejoon Im, University of Virginia

Abstract

In this paper, I examine the relationship between trading blocs and Foreign Direct Investment (FDI). Firms in the model serve foreign markets either by exporting or by setting up plants abroad, which is FDI. I find that countries forming a bloc could attract FDI from non-member countries. However, I show by using a coalition formation game that this FDI-attracting bloc cannot be an equilibrium outcome, a striking result which is mainly related to the adverse welfare effects of the tariff-jumping FDI. This result contrasts with the common belief that FDI is a key reason for countries to seek a trading bloc.  

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