New Regionalism: Integration as a Commitment Device for Developing Countries

Increasingly, developing countries embrace foreign direct investment (FDI) and simultaneously
pursue economic integration with developed countries. Foreign investment is subject to sovereign risk and free trade agreements may serve as a commitment mechanism in order to achieve higher sustainable levels of FDI. The paper shows that such agreements, by inducing sunk investments in expanding export sectors, can indeed increase the level of self-enforcing FDI.