This argument is consistent with the fingings of Graham and Wada (2000), who show that US FDI to Mexico began to grow rapidly in the late 1980s, much earlier than the implementation of NAFTA, and attribute the increase to Mexico’s unilateral policy reforms. In the case of MERCOSUR, Blomstr ̈om and Kokko (1997) show that extra-PTA FDI responded more strongly to the macroeconomic stabilization programs than the early stages of the Southern Cone project. However, subsequent deeper integration with the establishment of the customs union seemed to result in significant increases in the US investment position in the region. Chudnovsky and L ́opez (2001) confirm this result by finding that most of new FDI in MERCOSUR came from outside the PTA. In addition, the benefits of greater FDI were not shared equally across PTA members: due to stronger location advantages, Argentina and Brazil seemed to reap the bulk of the gains.

The evidence on the above agreements seems to suggest that most of the new FDI received by members of these PTAs is tariff-jumping and/or attracted to larger markets. However, these features cannot be characteristic of all PTAs in existence, since the large number of agreements in force would preclude the incentive for such behavior. For instance, the growing number of overlapping PTAs (documented in Medvedev (2006)) is likely to lower the marginal effect of new agreements on FDI through the extended common market channel. Consider the example of the East African Community (EAC) of Kenya, Tanzania, and Uganda, where all three countries are also members of the Cross-Border Initiative (CBI) agreement with several other African nations. Clearly, the extended common market FDI benefits that Kenya may experience from integrating with its EAC partners are not going to be seen again when it joins the CBI (although it may realize additional FDI gains from gaining new access to non-EAC member countries). At the same time, section 2.3 has noted that average MFN tariffs have declined significantly over the past two decades,<sup>13</sup> which is likely to significantly reduce incentives for tariff-jumping FDI. Finally, the preceding discussion shows that the size of net FDI inflows varies significantly by the host country,<sup>14</sup> and it is often difficult to separate the PTA effects from the consequences of unilateral liberalization or stabilization policies. Thus, in order to assess the nature of the relationship between preferential liberalization and FDI, cross-country panel estimates covering large numbers of PTAs are needed to complement the case studies of individual agreements.

It is only in the course of the last few years that cross-country analyses of the interactions between PTAs and FDI began to appear. Some of these studies have concentrated on bilateral investment, using a methodology similar to the gravity model of international trade, while others have chosen to focus on the net FDI position of sample countries. As an example of the former, Levy Yeyati et al. (2003) use 1982-1999 data on bilateral outward FDI stocks for 20 source and 60 host countries and find a positive relationship between FDI and membership in the same PTA. They estimate that, on average, joining a PTA increases bilateral FDI between members by 27 percent while a larger common market<sup>15</sup> affects host’s FDI with an elasticity of just over 0.1. However, their data does not cover FDI between developing countries and their PTA sample is limited to thirteen agreements, including the EU. In addition, although the authors do not impose the same functional relationship for North-South and North-North FDI, their model does not explicitly distinguish between the two by sweeping any potential differences into a country-pair specific intercept term. Finally, although the model in Levy Yeyati et al. (2003) is useful in determining that regional integration matters for bilateral FDI, its specification does not yield any predictions about the direction of the net effect on a country’s FDI position.

> 13More detailed evidence of this has been presented in Medvedev (2006).

> 14This variation could be related to the economic and geographic proximity of the partners.

> 15This variable is equal to the total GDP of all PTA members.

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