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The FTAA and the Location of FDI By Eduardo Levy Yeyati

The role of regional integration agreements as a determinant of the location of FDI has become an increasingly relevant issue for emerging economies. In Latin America, the largest effects are likely to be associated with the Free Trade Area of the Americas (FTAA). In this regard, there are a number of highly relevant questions: For instance, what effect will the FTAA have on FDI from the US and Canada to Latin American countries? How will it affect FDI from the rest of the world? What are the implications for a country such as Mexico, whose preferential access to the US may be diluted? Should we expect to see winners and losers, and if so, what determines whether a particular country wins or loses? To address these questions, in this paper we look at the impact of regional integration on FDI, and attempt to derive conclusions regarding the likely impact of the FTAA on countries in Latin America. * Paper prepared for the IDB-Harvard Conference on the FTAA in Punta del Este, Uruguay. The views expressed in this document are the authors’ and do not necessarily reflect those of the Inter-American Development Bank. The authors would like to thank Josefina Posadas for her invaluable research assistance, and Stephen Meardon for his contribution to the policy discussion. We are grateful to Andrés Rodríguez Clare, Antoni Estevadeordal, Renato Flores, José Luis Machinea, Andrés Velasco and seminar participants at the IDB-Harvard conference for comments and suggestions.