Effect of the Utilisation of Unilateral Trade? Preferences on Foreign Direct Investment Flows to Beneficiary Countries

Abstract

This article explores 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 uses an unbalanced panel dataset of 108 beneficiary countries of NRTPs over the period 2002-2019. By means of the two-step system Generalised Method of Moments estimator, it establishes that low utilisation rates of Generalised System of Preference (GSP) programmes are associated with greater FDI flows to less advanced beneficiary countries, including least developed countries (LDCs). However, high utilisation rates of GSP programmes induce greater FDI flows to advanced beneficiary countries, including Non-LDCs. In addition, low (high) utilisation rates of other trade preferences generate higher FDI flows to less advanced beneficiary countries (relatively advanced countries). The analysis also shows that GSP programmes and other trade preferences are strongly complementary in enhancing FDI inflows, especially for high utilisation rates of other trade preferences programmes. The utilisation of each of these two blocks of NRTPs generates greater FDI flows to countries that endeavour to export increasingly complex products, or those with lower dependence on natural resources. Finally, the utilisation of NRTPs generates higher FDI inflows to countries that substantially liberalise their trade regimes.