CoPS/IMPACT Working Paper Number G-333

Title: Introducing the effects of foreign direct investment into the GTAP-GAC model

Authors: Peter B. Dixon and Maureen T. Rimmer


Since 2018, we have built a series of GTAP models for Global Affairs Canada (GAC). Each of these models introduces modifications to the standard GTAP model. This paper describes GTAP-GAC3 in which we add an FDI extension. Our main focus is on the role of foreignaffiliate production as a substitute for imports and thereby a method for getting behind a tariff wall. GTAP-GAC3 could also be used for investigating scenarios in which FDI is motivated by productivity effects. Relative to other CGE models that incorporate FDI, GTAP-GAC3 has several advantages, including: year-on-year dynamics; realistic labour-market responses and high levels of commodity and country disaggregation. As explained in the paper, these advantages are achieved mainly by simplifications in demand-side specifications relative to those in other FDI-extended CGE models. By comparing GTAP-GAC3 tariff simulations conducted without and with the FDI extension, we show that FDI can have significant implications for simulation results.

JEL classification: C68; F21; F23

Keywords: Foreign direct investment; computable general equilibrium modelling; GTAP model

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