Testing for the Bidirectional Relationship Between FDI in Services and Trade in Services: Evidence from Emerging Economies

Abstract

We examine the two-way links between foreign direct investments (FDI) in services and trade in services for 26 emerging economies from 2003 to 2015 using sectoral and sectoral disaggregated FDI data. Within a multivariate framework, we use panel unit root tests, recently developed heterogeneous panel cointegration and panel vector error correction model (VECM). Our results confirmed the cointegrating relationship between trade in services, FDI in services, financial services FDI and nonfinancial services FDI. We find the existence of long-run unidirectional causality from trade in services to FDI in services. However, the disaggregated analysis shows a bidirectional link between nonfinancial services FDI and trade in services in the short run. Still, there is no causality between financial services FDI and trade in services both in the short run and long run. The result also shows the evidence of unidirectional causality running from trade in services to nonfinancial services FDI in the long run. It implies that sectoral decomposition matters in the FDI–trade nexus in emerging economies. JEL Codes: G20, F14, G20, F23