Impacts of regional economic integration on industrial relocation through FDI in East Asia

This paper examines the impacts of regional economic integration on the industrial relocation of participating countries focusing on the role of foreign direct investment. Focusing on the integrating countries' asymmetries in technology and market size, this paper demonstrates that preferential trade agreement increases intra-bloc vertical FDI flows when the integrating countries show large differences in factor costs. Moreover, when the technology gap is relatively large between the integrating countries, inter-bloc horizontal FDI tends to inflow to a county with a higher technology level even though its factor cost is higher. These results imply that Korea-China FTA might increase the inter-bloc horizontal FDI inflows into Korea when Korea has significant technological advantage while the intra-bloc vertical FDI inflows into China might be increased with increased pressure on the Korean economy to specialize in the headquarter service sectors. (C) 2006 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.