| There has been a dramatic increase in regional trading blocs over the last decade. In many cases, these trading blocs seem to have attracted substantial Foreign Direct Investment (FDI). In my dissertation, I build a theoretical model to explain the relationship between these facts. I then empirically assess the effects of trading blocs on U.S. outward FDI. The second chapter surveys the related literature on trading blocs and Multinational Corporations (MNCs).; In Chapter 3, "The Effects of Trading Blocs on FDI," I develop a three-country general-equilibrium model. Firms in the model serve foreign markets either by exporting or by setting up plants abroad. The latter is the operation of MNCs, that is, FDI. One finding is that countries that form a trading bloc may attract FDI from a non-member country, because the larger and more integrated market allows firms outside the bloc to recoup sunk costs in setting up plants inside. The welfare calculations are important elements in the coalition formation game of Chapter 4.; In Chapter 4, "Endogenous Coalition Structure with the Possibility of FDI," I analyze a coalition formation game among three countries in order to determine whether or not a trading bloc between two will form. When the formation of a bloc could cause FDI from a non-member country, countries will choose global free trade rather than forming a bloc, a striking result which is mainly related to the adverse welfare effects of the tariff-jumping FDI. This result contrasts with the common belief that FDI is a key reason for countries to seek a trading bloc.; In the final chapter, "The Effects of Trading Blocs on U.S. outward FDI," I use panel data of sales by the foreign subsidiaries of the U.S. MNCs to examine whether the formation of trading blocs causes more or less FDI from non-member countries. Using a region-fixed effects model, I find that countries forming blocs observe more FDI from non-members, but that FDI does not always increase with the market sizes of the blocs; as the market size increases, FDI decreases for smaller blocs but increases for larger blocs. |
