Do Deep Trade Agreements Boost Vertical FDI?

Abstract

An increasing number of preferential trade agreements (PTAs) and the rise of offshore production are distinctive features of the modern world economy. Exploiting the World Trade Organization (WTO) database on the content of deep trade agreements, the authors build on the existing literature to investigate whether deep trade agreements between countries are related to vertical foreign direct investment (FDI). Specifically, the authors show that deeper trade agreements increase vertical FDI measured with a proxy constructed in Osnago, Rocha, and Ruta with data on foreign firm ownership and subsidiaries’ revenues available in the ORBIS database.