Research On Investment Effect Under The Framework Of China-CAFTA Free Trade Area

Since the 1990 s, the trend of regional integration has entered an unprecedented period of rapid development. Meanwhile, the regional integration agreements(RIAs), which is “shallow integration” with the main content of traditional trade cooperation, has transformed into “deep integration” represented by investment cooperation. Thus, the economic effects of regional integration have gradually extended to the field of investment. Regional integration has made a profound impact on the direction and magnitude of foreign direct investment by changing the ownership advantage of multinational enterprises and the location advantage of the member states. In the wave of regional integration, China and ASEAN countries began to establish the China-ASEAN Free Trade Area(CAFTA) in 2002 relying on their geographical advantages and economic strength, which formally completed in 2010. The establishment of CAFTA will generate investment creation effect as well as investment diversion effect, and dynamic investment effects in the long run.Combined with regional integration theory and foreign direct investment theory, firstly, the paper analyzed the investment effects under the RIA framework in macro perspective by building a general equilibrium model. It is found that RIA will affect multinational enterprises’ FDI behavior through several channels like internal and external tariff level, degree of integration, labor costs and market scale. Secondly, according to our national conditions, on the basis of current FDI situations in China and ASEAN, the paper studied the investment effect under the framework of CAFTA specifically. Knowledge-capital model has been built to estimate the investment effect of CAFTA, and empirical results show that: the investment effect of CAFTA is not obvious in the short term, however, in the long term, the effect does exist and is significantly positive, which means that the establishment of CAFTA not only helps to increase mutual investment among member states, but also promotes investment in the region from outside the district. Finally, the paper built an empirical model to measure the factors which have an impact on the investment effect of CAFTA and reached the following conclusions: CAFTA’s FDI inflows are more likely to flow into the member states with larger domestic market scale, lower labor costs, higher levels of external tariffs and degree of integration.