3.3.3 Effects on Foreign Direct Investment
Besides its effects on trade and government revenue, trade facilitation is also likely to affect foreign direct investments. A priori, the effects could be either positive or negative. A multinational firm could locate a plant in a large market to avoid trade transaction costs related to inefficient trade procedures. For most developing countries, where trade procedures as a rule tend to be particularly costly, it is, however, more likely that the firm will aim to establish production capacity for export markets. In this case, inefficient trade procedures, which make it more costly both to export the firms’ own goods and to import necessary intermediates, will decrease the likelihood that a multinational will locate in this country. For a background to this and an overview of the very limited empirical literature, see Engman (2005).15