A Gravity Model Analysis of Effects of Regional Economic Integration on Factor Flows.

Padaki, Ramith; Goel, Mridula

Recent empirical studies suggest that regional economic integration provides important stimulus not only to trade, but also to FDI and labour flows. In contrast, theory on FDI and labour flows does not provide a definitive relationship about the effects on concurrent trade and investment liberalization in the form of economic integration. This study analyses the effect of Economic Integration - in particular, the European Union and its effect on these factor flows. It attempts to identify whether being a part of the European Union aids or deters factor mobility (Labour is quantified by migration flows and capital by Foreign Direct Investment flows). Utilizing a modification to the conventional 'Gravity Equation' of Trade for FDI and migration, a comprehensive study on a Panel Dataset of 8 countries (France, Germany, Italy, United Kingdom, Japan, USA, India, China) on the period of 2001-2010 is carried out. Different variations of the underlying model reveal that being a part of the European Union, does in fact contribute to greater bilateral factor mobility.

INTERNATIONAL economic integration; FOREIGN investments; LABOR mobility; GRAVITY model (Social sciences); EUROPEAN Union; INVESTMENTS

Journal of Economic Cooperation & Development, 2015, Vol 36, Issue 4, p121

1308-7800

Academic Journal