Foreign Direct Investment in Mexico since the Approval of NAFTA

Cross-country panel data are used to assess the effect of free-tradeagreements on flows of foreign direct investment (FDI). Free-tradeagreements are found to have a significant positive effect onFDI flows, and free-trade agreements are found to matter morefor the smaller members of the agreement. For example, the NorthAmerican Free-Trade Agreement’s (NAFTA) effect on FDIflows into Mexico is much larger than its effect on flows intothe United States. These cross-country results are used to assessNAFTA’s effect on FDI flows into Mexico. After controllingfor a set of other factors—such as an increase in worldwideFDI flows—the trade agreement is found to generate FDIflows nearly 60 percent higher than they would have been withoutthe agreement.