FDI and Exports: the case of the High Performing East Asian Economies

The paper investigates the flows of FDI and trade in eight high performing East Asian economies with a focus on the relationship between FDI and host country exports. The development and importance of FDI and trade for the region is described. The empirical part of the paper examines the relationship between FDI and host country exports, using data for the period 1980 to 2003. Time series regressions for individual economies as well as panel data estimation indicate that FDI inflows have a significant and positive effect on host country exports, suggesting that export-platform FDI may be important for the East Asian economies. No clear link between outflows of FDI and exports was found, allowing FDI outflows to function as both a complement and a substitute for source country exports. Granger causality tests find indications of FDI inflows causing exports, providing further evidence that the export-platform FDI strategy applies for the East Asian economies.

Introduction: Multinational enterprises (MNEs) generate the global flows of foreign direct investment but they are also extremely important for global trade flows. UNCTAD (2004) estimates that MNEs account for around two-thirds of world exports. Since MNEs are responsible for a large proportion of world trade, one may conjecture that there is a close relationship between flows of FDI and trade. An MNE network, consisting of a parent and affiliates, generates simultaneous flows of goods and investments. There is an increasing body of knowledge and associated models which explain international trade, but there is less theoretical consensus about the relationship between trade flows and FDI. The fact that exporting and local production are alternative ways for an MNE to serve the demand in a foreign market suggests a substituary relationship between FDI and trade. MNE production in the host country implies that local production is a substitute for exports from the home country. On the other hand, MNE affiliate production in a host country can generate a demand for intermediate goods from the parent, resulting in a complementary relationship between flows of FDI and trade (exports). Theoretical reasoning therefore supports both a complementary and a substituary relationship between FDI and trade, providing a strong incentive for empirical analysis.

Author: Andreas Johnson

Source: Royal Institute of Technology

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