Foreign Direct Investment in Mexico since the Approval of NAFTA

Cross-country panel data are used to assess the effect of free-trade agreements on flows of foreign direct investment (FDI). Free-trade agreements are found to have a significant positive effect on FDI flows, and free-trade agreements are found to matter more for the smaller members of the agreement. For example, the North American Free-Trade Agreement’s (NAFTA) effect on FDI flows into Mexico is much larger than its effect on flows into the United States. These cross-country results are used to assess NAFTA’s effect on FDI flows into Mexico. After controlling for a set of other factors--such as an increase in worldwide FDI flows--the trade agreement is found to generate FDI flows nearly 60 percent higher than they would have been without the agreement.