The current level and future evolution of trans-Pacific business linkages are tightly linked to domestic politics in Latin American countries. Where the structure of a nation's political institutions offer credible checks and balances against discretionary policymaking, external linkages including those with Pacific partners are stronger. Future liberalization including the formation of an FTAA is more likely when new policymakers arrive in office or when existing policymakers feel strong internal or external pressure to shift the course of their trade policy. A given liberalization is more likely to be sustained when coupled with short-term observable improvement in social and economic indicators. Countries with political institutions that fail to limit policymakers' discretion are particularly sensitive to a failure to demonstrate clear and immediate results. An analysis of the potential of an FTAA to influence trans-Pacific business linkages based on these arguments suggests that adoption is far from certain and that northern and southern countries alike will have to design an agreement with particular attention to social and economic consequences in Latin American countries.

The paper focuses on how the Free Trade Area of the Americas (FTAA), which will include both high-income developed and developing countries, will affect the options and investment strategies of multinational firms outside the region. Preliminary sections discuss the strategies open to both insider firms (headquartered with the Americas) and outsider firms, and the characteristics of technologies and countries that determine equilibrium location choices. Then I turn more explicitly to the question at hand, and suggest that a free-trade area of the Americas can be conceptually decomposed into (a) integration among the southern developing countries and (b) integration between the south and NAFTA. The first will give third-country multinationals horizontal investment opportunities to serve the effectively larger southern market with local production to serve the local southern market. The second gives third-country multinationals the opportunity to exploit low labor costs in the south to produce for export to North America (export-platform FDI). While this all sounds attractive for third-country firms, the theory emphasizes that the same advantages of integration are conferred upon U.S. and Canadian firms who have the additional advantage of supplying services and intermediate goods to southern affiliates at lower cost than the third country firms. This competitive effect from insider firms leads the theory to suggest weaker benefits to third-country firms than a simpler approach might predict.

ASEAN countries perceive the possible formation of the FTAA as a potential threat on the grounds that it may divert export markets and foreign direct investment (FDI) capital to the FTAA region. This effect, together with the “China factor” and the hangover from the 1997 financial crisis, posts a concern to the ASEAN countries' economic growth. We show that, with Singapore as an exception, ASEAN countries are afflicted with state activism, poor property rights protection, and under-developed corporate governance. We argue that a poor institutional environment may exacerbate the effects of an external shock – such as that of FTAA – and thus we need to explicitly incorporate the role of institutional environments in our analysis. We further argue that while FDI flows to locations with market opportunities, a location's institutional environment affects the composition of FDI. Due to ASEAN countries' institutional weakness, its substantial inward FDI has mainly substituted, rather than complemented, local entrepreneurship. As FTAA may divert FDI flows into ASEAN countries, their appropriate response is to improve institutional quality so that the share of the more productive complementary FDI will increase in the total FDI inflows.

This paper discusses how MNCs reacted to NAFTA and MERCOSUR in terms of their investment and operations patterns in three sectors - automotive, electronics, and apparel - and assesses the likely impact of the upcoming Free Trade Agreement of the Americas (FTAA). It shows that NAFTA functioned – at least in its first years - as an investment relocation engine, while MNCs' reaction to MERCOSUR was significant only in the automotive sector. The emergence of China and other Asian economies, with their low cost and vast markets, and the progressive enlargement in the scope of MNCs operations, seem to diminish the economic relevance of NAFTA and MERCOSUR. FTAA may provide a new impetus to the integration of the automotive industry in the Americas, and a stronger rationale for a slowdown of plant relocation to Asia in light industries such as electronics and garments. But it is unlikely that it will reverse current trends which point to Asia – with China at the epicenter – as the global magnet for manufacturing and exports.

Over the past decade, multinationals (MNCs) have followed three main objectives while entering Latin America: efficiency seeking, growth seeking, and resource seeking. Efficiency seeking MNCs aim to reduce costs in their global production process through access to cheaper labor, and proximity to destination markets such as the United States. Growth seeking firms enter Latin American markets to grow and/or acquire new markets. They are by nature more dependent on the macroeconomic conditions in local markets for their success. Resource seeking firms enter Latin America in the search of minerals, metals, and hydrocarbons. This paper introduces the concept of “natural markets” to explain the relative successes of MNCs from different regions – Europe (mainly Iberian), USA, and Asia. ‘Natural markets’ for a MNC are defined as those markets sharing a common history or language or having a high level of physical proximity with the country of origin of the MNC. This paper proposes that a firm focusing on natural markets has a comparative advantage, and thus increases the probability of its success. The paper also draws upon the experiences of successful MNCs in Latin America to infer some lessons for East Asian MNCs wishing to operate in the region.