FOREIGN DIRECT INVESTMENT AND TRADE: SUBSTITUTES OR COMPLEMENTS?*

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FOREIGN DIRECT INVESTMENT AND TRADE: SUBSTITUTES OR COMPLEMENTS?*

Mary Amiti,David Greenaway,Katharine Wakelin-2000-01-01

9

TL;DRAbstract

This paper tests whether FDI and trade are complements or substitutes, drawing on a theoretical framework developed by Markusen, Venables, Konan and Zhang (1996). That model provides a unified theory of FDI, which considers how country characteristics determine whether FDI is vertical or horizontal. We extend this to link country characteristics to the relationship between FDI and trade, and then test this relationship on bilateral data for the United States with 26 partner countries over 12 years. We find broad support for the theory.

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This paper tests whether FDI and trade are complements or substitutes, drawing on a theoretical framework developed by Markusen, Venables, Konan and Zhang (1996). That model provides a unified theory of FDI, which considers how country characteristics determine whether FDI is vertical or horizontal. We extend this to link country characteristics to the relationship between FDI and trade, and then test this relationship on bilateral data for the United States with 26 partner countries over 12 years. We find broad support for the theory.

Keywords

Foreign direct investmentEconomicsInternational tradeInternational economicsMacroeconomics

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