Does sub-sectoral FDI matter for trade in emerging economies? Evidence from nonlinear ARDL approach

Abstract

Using sectoral as well as subsectoral FDI data, we explore the asymmetric effect of nonfinancial services FDI on trade in services for 24 emerging economies for the period 1999–2016. We employ the panel unit root tests and recently developed panel nonlinear autoregressive distributed lag (NARDL) model, to analyze the impacts of FDI in service and its sub-sectors on trade in services. Our results confirm the nonlinear asymmetric relationship between nonfinancial services FDI and trade in services. We find that FDI in financial services has positive and significant impacts on trade in services, which implies there exists a complementary relationship between FDI in financial services and trade in services. Concurrently, positive changes in nonfinancial services FDI have adverse effects on trade in services in the long run, which indicates the substitutability of same with trade in services. Our results also show the complementary relationship between nonfinancial services FDI and manufacturing trade.