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Ms. Florence Jaumotte
The paper investigates whether the market size of a regional trade agreement (RTA) is a determinant of foreign direct investment (FDI) received by countries participating in the RTA. This hypothesis is tested on a sample of 71 developing countries during the period 1980-99. Evidence is found that the RTA market size had a positive impact on the FDI received by member countries, even more so in the 1990s when such agreements were revived and became more widespread. The size of domestic population also seemed to matter, possibly because of its effect on the availability of the labor supply. It appears, however, that not all countries in the RTA benefited to the same extent from the RTA: countries with a relatively more educated labor force and/or a relatively more stable financial situation tended to attract a larger share of FDI at the expense of their RTA partners. This evidence suggests it is essential for all RTA countries to improve their business environment to the best available in the region. Finally, a partial negative correlation between the FDI received by RTA countries and that received by non-RTA countries possibly reflects a diversion of FDI from non-RTA to RTA countries. As an illustration, FDI benefits are simulated from the creation of a regional trade agreement between Algeria, Morocco, and Tunisia.
Ms. Florence Jaumotte

: Estimation in First Difference and Instrumentation 7. Regional Model: Sensitivity Tests 8. FDI in Percent of GDP for Maghreb Countries 9. Actual and Predicted FDI Stock-to-GDP Ratio for Maghreb Countries 10. Actual and Predicted Average Annual Growth of the FDI Stock-to-GDP Ratio 11. Growth in the FDI Stock-to-GDP Ratio Implied by the Creation of a Maghreb Regional Market Figures 1. Partial Correlation FDI—Domestic Market Size 2. Partial Correlation FDI—Regional Market Size Appendices I. List of South-South Regional Trade Agreements II. List of Sample

Ms. Florence Jaumotte

. Evolution of FDI in Maghreb countries Table 8 reports the FDI stock-to GDP ratios and FDI inflow-to-GDP ratios for Algeria, Morocco, and Tunisia in the 1980s and 1990s. Tunisia appears to have attracted substantially more FDI relative to its size than Algeria and Morocco. It maintained an average stock of FDI close to 80 percent of GDP over the 1980s and 1990s. 17 During this same period, the stock of FDI averaged 7 percent of GDP in Morocco and 4 percent of GDP in Algeria. Similarly, FDI inflows averaged 2.7 percent of GDP in Tunisia during the 1980s and 1990s