| The thesis provides answers to how foreign direct investment (FDI) and trade agreements interact to affect bilateral trade in manufacturing industry. Trade agreements and FDI have been increasing throughout the world. Most of the studies focus on whether trade agreements are trade creating or diverting. The fact that trade agreements interact with other factors such as FDI, outsourcing, etc to affect trade get little attention. This study addresses this issue using NAFTA, MERCOSUR, EU, ANDEAN, ASEAN, ASEAN3, ECOWAS and rest of the world (ROW) from 1995-2004 for 28 industries and uses fixed effects and pseudo poisson maximum likelihood (PPML) in a gravity model framework to conclude that FDI inflows and intra-bloc trade diverts trade. Also, FDI inflows and extra-bloc trade diverts trade except for ASEAN and ECOWAS and ASEAN+3 and ECOWAS. The inflows of FDI has a dampening effect into an intra-bloc or extra-bloc due to intra-industry trade in the manufacturing sector. Hence, the interaction of FDI inflows and intra or extra-bloc trade diverts bilateral trade, but increases intra-industry trade. |
