| This dissertation explores how a trade liberalization policy affects four important factors of economic development: Soft Budget Constraint (SBC), productivity, employment, and Foreign Direct Investment (FDI). In the first chapter, I develop a theoretical model to analyze the relationship between SBC and trade liberalization. The results show that a SBC may negatively affect a firm's decision to export, and that trade liberalization can reduce the SBC in a country. In the second chapter, I empirically analyze how Free Trade Agreement (FTA) can affect FDI depending on member countries' economic development and characteristics of FDI in 62 countries from 1982 to 2005. I divide FDI into vertical FDI and horizontal FDI when setting up the econometric model and focus on the latter which is more dominant among developed countries. Statistical results show that FTA tends to negatively affect FDI among developed member countries, while there is a positive relationship between a developed home country and a developing host country. These results are consistent with the so-called Capital-Knowledge model of FDI. In the third chapter, I empirically analyze the effects of trade liberalization on total factor productivity (TFP) and employment in 100 countries from 1976 to 2001. The results show a generally positive effect of trade openness, which appears to be more pronounced in comparative advantage industries than in comparative disadvantage industries. This implies that economic growth triggered by trade liberalization enhances ex post comparative advantage in industries with ex ante comparative advantage. |
