Foreign Direct Investment and International Trade: Empirical Analysis of Mutual Influence

I M Drapkin,R I Groznykh,S A Lukyanov

doi:10.15826/vestnik.2020.19.4.021

Abstract

Foreign direct investment and international movement of commodities are interrelated in the world economy. At the same time, the nature of this relationship and the causality issues are ambiguous and need to be studied from both theoretical and empirical sides. The aim of this paper is to estimate empirically the mutual influence of foreign direct investment and international trade in the modern economy. The econometric model is based on the gravity approach, the estimation is made using the Poisson pseudo maximum likelihood method on the data for 67 host and 109 home FDI countries for the period of 2001–2016. The hypotheses on the positive mutual influence of foreign direct investment and international trade are tested. A positive and significant influence of export and import flows on inward foreign direct investment is observed. The largest impact of export and import on foreign direct investment is observed when a two-year lag is considered. We could not reveal a significant influence of foreign direct investment on export and import flows either within one year, or for the lagged FDI values. The authors argue that pro-trade government policy, aimed at the integration of the country into global value chains is an important factor stimulating the inflow of foreign direct investment to the country. From the practical point of view, understanding the causal linkages between export, import and foreign direct investment helps state authorities better forecast the direct and indirect effects of various trade policy incentives.

Highlights

In the Portuguese economy traditional sectors - textile, apparel, shoemaking, and other consumer goods industries - have an above average weight in production, employment and exports compared to most developed economies
Portuguese investment abroad has no effect on either exports or imports. These results clearly show that, in the Portuguese economy, inward foreign direct investment (FDI) has a positive correlation with trade suggesting a complementary relation between the two
This study examines the relation between FDI stock, inward and outward, and Portuguese trade, imports and exports

Summary

Introduction

In the Portuguese economy traditional sectors - textile, apparel, shoemaking, and other consumer goods industries - have an above average weight in production, employment and exports compared to most developed economies. The second set of regressions refers to the gravity model – equation 3 - including dummies that capture particular geographical patterns, namely trade preferences with the EU and than trade with candidate countries, and other regional groups - America, Asia and Oceania. The estimates of variables Lang – common language with Brazil - and Bord – common border with Spain – are not statistically significant, meaning that Portuguese imports from those countries are not above their normal values as given by the gravity determinants.

Results

Conclusion