Effect of the Utilization of Unilateral Trade Preferences on Foreign Direct Investment flows to Beneficiary Countries

Abstract

This article has explored the effect of non-reciprocal trade preferences (NRTPs) offered by the QUAD countries to developing countries on the foreign direct investment (FDI) flows to these developing countries. The analysis has used an unbalanced panel dataset of 108 beneficiary countries of NRTPs over the period 2002-2019. By means of the two-step system GMM, it has established that low utilization rates of GSP programs are associated with greater FDI flows to less advanced beneficiary countries, including, least developed countries (LDCs). However, high utilization rates of GSP programs induces greater FDI flows to advanced beneficiary countries, including NonLDCs. In addition, low (high) utilization rates of other trade preferences generate higher FDI flows to less advanced beneficiary countries (relatively advanced countries). The analysis has also shown that GSP programs and other trade preferences are strongly complementary in enhancing FDI inflows, especially for high utilization rates of other trade preferences programs. The utilization of each of these two blocks of NRTPs induces greater FDI flows to countries that endeavour to export increasingly complex products, or those with lower dependence on natural resources. Finally, the utilization of NRTPs generates higher FDI inflows to countries that substantially liberalize their trade regimes. JEL Classification: F13; F14; F20.