Regional trade agreements (RTAs) refer to legal agreements between one or more countries that agree to reduce trade barriers between each other rather than with all countries in general. Countries can benefit by reducing the tariff and non-tariff barriers under RTAs. Due to these benefits, firms in these countries can reap economies of scale and increase the volume of investment and trade flows between members. A literature review shows that RTAs can affect intra-regional foreign direct investment (FDI) through the trade liberalisation and investment liberalisation processes. Regional trade agreements can improve a member country’s location advantage to induce FDI flows.

In the global trend of regional economic integration, New Zealand (NZ) officially signed the NZ–China Free Trade Agreement (FTA) with China in April 2008. However, there has been very little research focus on the NZ–China FTA and its effects on FDI. This study therefore fills this gap in the literature by undertaking a critical literature review of the impact of RTAs on FDI, and placing it in the NZ context of the NZ–China FTA. This is of significance because NZ is the first developed country to enter into an RTA with a large developing country (China). Furthermore, this study analyses the effect of the NZ–China RTA on FDI by analysing historical NZ–China direct investment data and the investment intensity index between NZ and China. The result shows there has been a favourable impact on NZ’s inward FDI stock from China after the RTA was signed. Since Chinese agricultural and dairy product demands are growing fast, after the RTA was signed, Chinese investors increased their agricultural and dairy investment in NZ. However, the impact on NZ’s outward FDI stock to China is not that strong and shows no clear trend over the post-RTA period. Financial crisis, cultural differences and less government support are the main factors that limit the success of NZ’s investment in China. The shares of both inward and outward FDI from and to China are relatively small compared with NZ’s other main trading partners. Because only four years have passed since the signing of the NZ-China RTA, it is still too early to positively conclude that the agreement has had a favourable impact on FDI flows for NZ. This is subject to limitations with regard to sectorial and country-wise bilateral FDI data from NZ sources. Therefore, the future trends of NZ–China bilateral FDI should be monitored to evaluate the influence of the RTA in the future.