The Effects of Trade Facilitation on Horizontal and Vertical Foreign Direct Investments.

Abstract: Along with a deeper integrated world economy have countries discovered the benefits of harmonizing and simplifying the procedures linked to international trade, referred to as trade faciliation. A quite unexplored part of this field of research is yet how trade facilitation affects international investment flows, referred to as Foreign Direct Investments (FDI). In theory is trade facilitation affecting FDI differently as a result of the incentives for the FDI. If trade is facilitated on a market where the subject to the investment is aimed for further export will less costly and time-consuming trade procedures increase the inflows of investments to that country. If trade is on the other hand faciliated in a country where no further export is intended can the investments levels actually decrease. The aim of this thesis is to empirically demonstrate the ambiguous link between trade facilitation and FDI with the purpose of helping policy makers strategize their trade facilitating actions. In order to show this link are the FDI hosting countries being divided into groups depending on market size and level of development. The survey is conducted by using a gravity model where the sample ranges from 2005 to 2012 and is being estimated by a Poisson Pseudo Maximum Likelihood regression. The results show how facilitated trade in a host country causes greater inflows of FDI than before. These positive effects are however greater if the receiving market is small which indicates that countries with the intention to export a foreign-funded product will benefit more from trade facilitation than larger markets where the product is being domestically consumed. Further results show that trade facilitation is more beneficial for large developed countries than small underdeveloped countries.