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Foreign Investment and the Mediation of Trade Flows

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  • Deborah L. Swenson

Abstract

How does foreign direct investment affect the trade between nations? While many theories of the multinational firm are based on the premise that foreign production and trade are substitutes, most empirical studies of foreign investment and trade uncover a complementary relationship. This paper shows that the mismatch between theoretical work and empirical findings is a byproduct of data aggregation. When the unique country–industry patterns of mostly OECD country foreign investments in the US are analyzed, predicted substitution patterns are revealed at the data level that roughly corresponds to broad products. The complementary effects of foreign investment on trade emerge at higher levels of aggregation.

Suggested Citation

  • Deborah L. Swenson, 2004. "Foreign Investment and the Mediation of Trade Flows," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 609-629, September.
    • Handle: RePEc:bla:reviec:v:12:y:2004:i:4:p:609-629
    DOI: 10.1111/j.1467-9396.2004.00470.x
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    References listed on IDEAS

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