between preferential liberalization and net FDI inflows during the 1980s and early 1990s.

Focusing instead on the later part of the 1990s and the early years of the new millennium changes the PTA-related results dramatically. Due to improved data coverage, the cross-sectional dimension of our panel increases to 85 countries (this is the full sample less Netherlands Antilles and Equatorial Guinea). The estimated coefficients for this sample are shown in column (3) of Table 8. The model coefficients are significant as a group (Wald _p_ = 0 _._ 00), but, in addition to GDP growth and inflation, the REER variable is not significantly different from zero (the _p_ -values are 0.315, 0.108, and 0.214, respectively). On the other hand, both of the PTA variables are significant at the one percent level and have the expected signs. The estimated elasticities of _PTAGDP_ and _DISTA_ are somewhat larger than the results in the reference specification. Thus, Table 8 suggests that the estimated link between preferential liberalization and net FDI is mainly driven by the effects of PTAs that have come into force during the late 1990s and early 2000s.

There are several reasons why we may expect this result. First, as mentioned earlier, PTAs signed over the course of the last decade have generally focused on “deep integration” provisions much more heavily than the earlier agreements. In addition, the “third wave’ of PTAs featured many agreements that were signed between countries that are not each other’s major trading partners, therefore making other aspects of integration relatively more important. A particularly important link between the new PTAs and FDI is the vast expansion in trade in services, to which FDI is a natural complement. As an example, consider the recent US-Singapore FTA, which is unlikely to have a significant effect on merchandise trade flows between the two partners (especially taking into account Singapore’s very liberal MFN tariff schedule) but is expected to have a much larger impact on the already substantial trade in services between the two economies. Finally, studies such as World Bank (2002) have documented the tremendous expansion in the role of FDI as a source financing (especially in developing countries) during the late 1990s and early 2000s, and at least part of this expansion is potentially linked to the increased global integration brought about by the “third wave” PTAs.

Despite these arguments, there also several reasons to be cautious when interpreting the above results. First, causality is much more difficult to establish than correlation. Therefore, even though both the number and scope of PTAs were increasing dramatically at the same time as average country net FDI inflows were surging, it is impossible to know for certain that the latter were directly caused by the former. It may even be the case that, as FDI increased globally in the late 1990s, many countries actively pursued PTAs as a strategy to attract additional net FDI inflows. At the same time, the hope of attracting additional FDI is only one of the many reasons to join PTAs and, since only one-quarter of all PTAs signed during the 1995-2004 period were NorthSouth, it was probably not the main driver of the growth in the number of PTAs during that time. Second, the results of Table 8 do not necessarily imply that the “deep integration” provisions of later PTAs are responsible for the empirical PTA-FDI link, since the “deep integration” provisions are not the only feature differentiating the later PTAs and some of the earlier ones also contained chapters dealing with the liberalization of investment flows (e.g. EFTA, MERCOSUR, US-Israel FTA). Finally, there are also some qualifications on econometric grounds. It is difficult to compare results across various samples because they generate different estimates of the AR(1) parameters and the structure of the variance-covariance matrix. In some cases, the very small sample sizes preclude all but the most general of inferences, since the properties of the FGLS estimators are only known asymptotically. Therefore, only broad-based conclusions are likely to be valid based on the results found in this section, since direct comparisons of individual coefficients from different models are generally inappropriate.

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