Foreign direct investment in Mexico since the approval of NAFTA

Cross-country panel data are used to assess the effect of free-trade agreements on flows of foreign direct investment (FDI). Free-trade agreements are found to have a significant positive effect on FDI flows, and free-trade agreements are found to matter more for the smaller members of the agreement. For example, the North American Free-Trade Agreement's (NAFTA) effect on fdi flows into Mexico is much larger than its effect on flows into the United States. These cross-country results are used to assess NAFTA's effect on fdi flows into Mexico. After controlling for a set of other factors-such as an increase in worldwide fdi flows-the trade agreement is found to generate fdi flows nearly 60 percent higher than they would have been without the agreement.