1The Impact of Trade Integration on FDI Flows: Evidence from EU and ASEAN+3

In recent years, the debate on the trade effects of regionalism experienced a strong revival. While empirical research has mostly focused on the impact of PTA (preferential trade agreements) FTA (free trade area), RTB (regional trade block), aspects of trade integration, on trade flows (Soloaga and Winters, 2001). Only a few efforts, however, examine the importance of joining an integration group (i.e., regionalism) on foreign direct investment flows. As far as trade integration affects impediments to both trade and multinational activity, one should expect an effect on bilateral FDI as well. This paper will be first concerned with the most important regional trade blocks: European Union (EU) and ASEAN+3, and then will concentrate on the impact of the trade integration agreements (TIA) on the evolvement of FDI flows in these blocks. The purpose, in principle, is to investigate the hypothesis in which to what extent trade integration affects FDI flows in the blocks and how important it works in FDI creation or FDI diversion. The empirical analysis follows the traditional literature on trade and FDI and is based on a gravity model. Our nested design of integration group and integration phase effects allows isolating the impact of these blocks ' integration steps. A panel data method is empirically used to estimate the FDI gravity model employing data on the country members of EU and ASEAN+3 over the period 1992-2003