but note that FDI inflows for Greece (as a percentage of GDP) remained relatively unchanged following its accession to the EU in 1981—a phenomenon attributed mainly to its distorted policy environment at the time. Furthermore, the authors argue that the additional FDI in Spain and Portugal represented a one-time portfolio adjustment by investors in favor of these countries, and that the share of FDI to GDP returned to its pre-accession levels in the longer term. World Bank (2000) documents an interesting experience for countries outside the EU: FDI declined in EFTA members following the phase-in of the EU Internal Market Program (IMP) and did not recover until the establishment of the EEA.<sup>12</sup> Other studies present results based on more formal models. For instance, Pain (1997) uses data on the stock of British FDI in seven sectors in the EU and the US over the 1981-1992 time period to isolate a sharp increase in intra-EU FDI following the implementation of the IMP in 1986. Pain and Lansbury (1997) present similar evidence for German investment into the rest of the EU. On the other hand, Dunning (2000) argues that while the IMP resulted in a substantial net FDI increase in Europe, the majority of that increase came from countries outside the EU. Furthermore, the direct impact of the IMP on FDI is small compared to the response of investment to greater market size and higher income levels generated by European integration.

The evidence on FDI flows into Canada and the US as a result of the Canada-USA FTA (CUFTA) and NAFTA largely parallels the EU findings. For the former agreement, Blomstr ̈om and Kokko (1997) show that while intra-PTA FDI into Canada declined, extra-PTA FDI increased just enough to offset the decrease. In the US, net FDI rose as a result of CUFTA, but this was achieved through a large increase in FDI from outside the PTA, which more than made up for the decreased investment from Canada. Globerman (2002) echoes these findings by showing that following CUFTA, and, subsequently, NAFTA, FDI flows to Canada from Europe increased much more than those from the US. Thus, there is some support for the tariff-jumping hypothesis: since the consecutive PTAs provided Canada with secure market access to the US, they encouraged new FDI inflows from outside the PTA. At the same time, Canada’s outgoing FDI to Europe grew faster than its FDI to the US. Globerman (2002) interprets this finding as indicative of the fact that increased trade intensity is not necessarily coincident with increased FDI intensity,” which could be due the existing infrastructure allowing for increased intra-industry CUFTA trade without any significant demand for new FDI. On the other hand, Buckley et al. (2000) find that US FDI into Canada was encouraged by CUFTA and NAFTA; however, exchange rate changes over the same period also supported new FDI.

Turning to PTAs involving developing countries, Lederman et al. (2005) note that FDI into Mexico increased in the first two years following the agreement, but leveled off soon afterwards. In this sense, the pattern of North-South FDI under NAFTA is similar to the stock adjustment experienced by the new EU entrants. Lederman et al. (2005) also show that this increase in FDI to Mexico was dominated by North American sources, while inflows from other regions rose to a more limited extent. The former is consistent with Monge-Naranjo (2002), who finds a positive effect of NAFTA on US-sourced FDI in Mexico only during the first two-three years of the agreement. In addition, Lederman et al. (2005) provide evidence that NAFTA resulted in diversion of FDI from other countries in Latin America, as Mexico’s share of US-sourced investment remained stable throughout the 1990s while the share of other countries declined. Blomstr ̈om and Kokko (1997) and Burfisher et al. (2001) argue that one of the main contributions of NAFTA was an improvement in Mexico’s investment climate, achieved largely through its lock-in of policy reforms.

> 12EEA is a free trade agreement between the EU and three of the EFTA countries (Iceland, Liechtenstein, Norway). See Appendix E of Medvedev (2006) for more details.

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