Abstract
This study examines the effects of foreign direct investment (FDI) on bilateral trade between East and South Asian emerging economies, including their related trading partners. We cover the bilateral data on trade and FDI from June 2001 to June 2019. We estimate an augmented gravity model of trade to examine the study sample. This study is the first to use the Mundlak approaches an alternative for the fixed effect model to empirically estimate the relationship between FDI and trade among the countries in the region. Results show that free trade agreements (FTAs) and the corruption perception index (CPI) significantly and positively affect bilateral trade. However, the distance variable has become insignificant after introducing the FTA variable to the model. This finding indicates that FTAs marginalize the effect of distance on bilateral trade between the member countries. Thus, policymakers in developing countries should encourage and liberalize FDI from developing countries to enhance the bilateral trade volume.
Highlights
International trade is a significant source of technological innovation, competition, specialization, economic scale, and fundamental knowledge between countries
The result reveals that a 1% increase in foreign direct investment (FDI) flows results in an increase of 7% in trade flows to the developing countries
This study explores the relationship between FDI and bilateral trade flowing developing countries of Asia
Summary
International trade is a significant source of technological innovation, competition, specialization, economic scale, and fundamental knowledge between countries. These factors play key roles in global economic development. International trade plays a key role in the development of the global economy and the endorsement of competition, specialization, knowledge transfer, and economic scale across the borders (Ali et al, 2015; Wang, 2010). International trade is a source of skill advancement through importation and adoption of advanced and innovative technology and production processes (Belloumi, 2014). International trade encourages trading partners to communicate, which leads to learning and sharing of advanced technologies, the materials they use, and manufacturing processes and managerial skills (Ali et al, 2015)
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