The first experiment involves limiting our focus to low and middle income countries,<sup>69</sup> which results in the reduction of sample size to 1320 observations, representing an unbalanced panel of 76 countries between 1980 and 2004. The FGLS estimates are shown in column (2) of Table 7. Both the coefficient values and their significance levels are not too different from the reference specification,<sup>70</sup> and a Wald test ( _p_ = 0 _._ 00) indicates that the model coefficients are significant as a group. The coefficients on the extended common market and average distance to PTA partners are somewhat larger than in the reference model, and significant at the one percent level. In contrast, we get vastly different results when we estimate equation (2) for the sample of high income countries only. These estimated coefficients are shown in column (3), and their values differ dramatically from both the full sample and the developing countries model. Only the GDP, openness, and world FDI variables are significantly different from zero, indicating that neither the size of the extended common market nor the average distance from PTA partners are important determinants of net FDI inflows for the high income countries in our sample. Therefore, our results suggest that the estimated link between preferential liberalization and net FDI inflows is primarily driven by NorthSouth and/or South-South FDI.<sup>71</sup> Since most of the variance in the value of _PTAGDP_ is accounted for by PTAs with high income partners (by definition most Southern countries do not have large GDP) and since the positive effect of _PTAGDP_ is driven mainly by PTAs between small and large partners, North-South PTAs are probably more important than South-South agreements in generating additional net FDI inflows. One important qualification to this finding is the fact that the fifteen member European Union is treated as a single country in our sample, which limits the cross-sectional dimension of the panel to ten members. Most importantly, this approach prevents us from capturing the FDI stimulus experienced by late entrants to the EU such as Ireland, Greece, Portugal, and Spain.<sup>72</sup> Since North-North PTAs in our sample are few (they are EFTA, the EEA, and USA-Canada as a part of NAFTA) and South-North FDI is relatively small, it is perhaps not surprising that we cannot identify a robust relationship between, on the one hand, _PTAGDP_ and _DISTA_ and, on the other hand, net FDI inflows for high income countries. In addition, the relatively small size of the high income sample may not provide enough data points to accurately capture the relationship even if it exists, especially considering the fact that we have to use up additional degrees of freedom to estimate the autocorrelation coefficient and the parameters of the variance-covariance matrix.<sup>73</sup> Next, we turn to decomposing the full country sample into separate time periods. Medvedev (2006) showed that the mid-1990s witnessed an explosive growth in the number of PTAs, which increased by 130 percent from 1995 to 2004. Many of these new agreements were of the “third wave” kind, putting much more emphasis on “deep integration” provisions than the earlier PTAs. Therefore, we would like to test whether the PTA-FDI link that we have established in the course of earlier analysis is larger or more significant in the sample limited to the later PTAs. The results of these experiments are summarized in Table 8, where column (1) again repeats the reference

> 69We define high income countries as twenty four members of the OECD plus Liechtenstein.

> 70Inflation becomes insignificant at the ten percent level only because the _p_ -value changes 0.099 to 0.10.

> 71We have also estimated the model in equation (2) separately for developing countries in Latin America, East and South Asia, Eastern Europe, Middle East, and Africa. The estimates are shown in Appendix B. Since the relevant sample sizes are quite small, the results are not very robust and most coefficient estimates are insignificantly different from zero. For these reasons, any conclusions drawn from the estimates in Table 15 are tentative and must be interpreted with a large degree of caution.

> 72See section 3 for references to the literature that has studied the FDI consequences of the early rounds of EU accession.

> 73In the case of small sample sizes, it is quite important that we impose a common autocorrelation parameter, since this results in substantial savings in degrees of freedom used and therefore increased efficiency.

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