Regional Investment Liberalization and FDI*

The proliferation of regional economic integration makes an economic assessment of regional investment liberalization ever more important for policy. This paper conducts a counterfactual policy experiment to simulate the response of heterogeneous multinational firms to a regional decline in investment costs. We find that regional integration yields a welfare gain for integrating economies through the entry of new multinational firms and expansion of offshore production by incumbent multinationals. While the effects of regional integration differ significantly by individual firms, the most productive firms benefit from a variety of regional integrations through intensive-margin growth. Additionally, regional integration could significantly discourage the foreign direct investment (FDI) activity of parent firms headquartered in a country that is not participating in regional integration