Inbound foreign direct investment in Asia-Pacific countries: the long-term impact of trade and economic agreements

Dmitrii A. Izotov

Abstract


Relevance. Over the past three decades, the Asia-Pacific region has attracted more than half of the world’s foreign direct investment (FDI), most of it staying within the area. Trade and economic agreements designed to lower barriers have played a key role in attracting FDI across the region. However, research on the effects of these agreements is limited and often focuses on individual economies. Given the area’s economic diversity, the long-term impact of such agreements on FDI inflows, as well as how these effects compare with global trends, remains unclear.

Research Objective. The study aims to provide quantitative estimates of the long-term impact of trade and economic agreements on accumulated FDI inflows in the Asia-Pacific region.

Data and Methods. The study uses a structural gravity model with panel data on bilateral FDI flows between Asia-Pacific countries for 1992–2023.  The dependent variable was compiled from international and national databases. Estimates were obtained using the Poisson pseudo-maximum likelihood method.

Results. The long-term positive direct effect of agreements came primarily from extended free trade zones (FTA+), which increased FDI inflows by 35%.  Other trade agreements had little direct effect, while bilateral investment agreements actually restrained FDI inflows. The study also found the following accumulated effects: FTA+ and investment agreements boosted FDI inflows by 37% and 16%, respectively, whereas trade agreements without provisions to facilitate FDI reduced inflows by 59%.

Conclusions. In their investment interactions Asia-Pacific countries adopt different long-term strategies. Some promote FDI through FTA+ and investment agreements, in line with global patterns, while others limit foreign capital via trade agreements that lack measures to reduce FDI barriers.


Keywords


foreign direct investment, integration, trade agreements, investment agreements, direct effect of trade and economic agreements, accumulated effect of trade and economic agreements, Asia-Pacific region

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References


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DOI: https://doi.org/10.15826/recon.2025.11.4.024

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