Deep Trade Agreements and Vertical FDI: The Devil is in the Details

42 Pages Posted: 5 May 2020 Last revised: 4 Sep 2020

See all articles by Alberto Osnago

Alberto Osnago

World Bank

Nadia Rocha

The WorldBank Group

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Date Written: November / Novembre 2019

Abstract

Although pre‐1990s preferential trade agreements focused mostly on tariff liberalization, recent agreements increasingly contain deep provisions in diverse areas, such as intellectual property rights, investment and standards. At the same time, there has been a remarkable increase in the internationalization of production through foreign direct investment and outsourcing. This paper studies how deep trade agreements affect the international organization of production. Using new measures of the depth and content of preferential trade agreements and of vertical foreign direct investment, the analysis finds evidence that the depth of trade agreements is correlated with vertical foreign direct investment. Furthermore, this relationship is driven by the provisions that improve the contractibility of inputs provided by suppliers, such as standards, while provisions that increase the contractibility of headquarter services, such as intellectual property rights and investment protection, are generally negatively correlated with foreign investment. This finding is consistent with the so‐called “property rights” theory of the multinational firm according to which improving the contractibility of an input reduces the importance of giving incentives through ownership.

Accords de libre‐échange approfondis et investissements directs étrangers verticaux : le diable se cache dans les détails. Alors que les accords commerciaux préférentiels passés jusque dans les années 90 s'attachaient principalement à la libéralisation tarifaire, les plus récents comprennent un nombre croissant de dispositions relatives à différents domaines, par exemple les droits de propriété intellectuelle, les investissements ou les normes. Dans le même temps, on observe une augmentation notable de l'internationalisation de la production via l'investissement direct étranger vertical et la sous‐traitance. Cet article étudie la façon dont les accords commerciaux approfondis ont une incidence sur l'organisation de la production à l'échelle mondiale. Grâce à de nouvelles façons d'évaluer l'ampleur et le contenu des accords commerciaux préférentiels mais également des investissements directs étrangers verticaux, nous avons constaté que la profondeur desdits accords est corrélée à l'investissement direct étranger vertical. De plus, cette corrélation est mue par les dispositions qui permettent d'améliorer la contractibilité des apports fournisseurs, notamment en matière de normes. En revanche, les dispositions qui augmentent la contractibilité des services administratifs centraux, par exemple les droits de propriété intellectuelle ou la protection des investissements, ont une corrélation généralement négative sur l'investissement étranger. Cette observation corrobore la théorie dite des droits de propriété  des sociétés multinationales en vertu de laquelle la contractibilité d'un apport limite la pertinence d'offrir des avantages via la propriété.

Suggested Citation

Osnago, Alberto and Rocha, Nadia and Ruta, Michele, Deep Trade Agreements and Vertical FDI: The Devil is in the Details (November / Novembre 2019). Canadian Journal of Economics/Revue canadienne d'économique, Vol. 52, Issue 4, pp. 1558-1599, 2019, Available at SSRN: https://ssrn.com/abstract=3591879 or http://dx.doi.org/10.1111/caje.12413

Alberto Osnago (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Nadia Rocha

The WorldBank Group ( email )

1818 H Street NW
Washington, DC 20433
United States

Michele Ruta

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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