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A Theory of the Relationship Between Foreign Direct Investment and Trade

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  • José Pedro Pontes

Abstract

Although empirical evidence shows that the relationship between foreign direct investment (FDI) and trade is complex, theories of international investment (both vertical and horizontal) present simple patterns of relation. By allowing for different locations of vertically-related stages of production and distinguishing between trade in finished goods and trade in intermediate goods, this paper introduces a non monotonic relationship between multinational firms and trade costs, which must be neither too high nor too low for FDI to arise. Exports and FDI be have as complements for high levels of trade costs and as substitutes otherwise. J.E.L. Classification: F23, F12, C72. Keywords: Foreign Direct Investment, Multinationals, Trade, Intermediate Goods, Non cooperative Games.
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  • José Pedro Pontes, 2003. "A Theory of the Relationship Between Foreign Direct Investment and Trade," Working Papers Department of Economics 2003/11, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    • Handle: RePEc:ise:isegwp:wp112003
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    References listed on IDEAS

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    1. Jyothi Pantulu & Jessie P.H. Poon, 2003. "Foreign direct investment and international trade: evidence from the US and Japan," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 241-259, July.
    2. Nigel Pain, 1997. "Export performance and and the role of foreign direct investment," National Institute of Economic and Social Research (NIESR) Discussion Papers 131, National Institute of Economic and Social Research.
    3. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
    4. Ignatius J. Horstmann & James R. Markusen, 2021. "Endogenous market structures in international trade (natura facit saltum)," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 2, pages 25-45, World Scientific Publishing Co. Pte. Ltd..
    5. Pain, Nigel & Wakelin, Katharine, 1998. "Export Performance and the Role of Foreign Direct Investment," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(0), pages 62-88, Supplemen.
    6. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
    7. Rowthorn, R E, 1992. "Intra-industry Trade and Investment under Oligopoly: The Role of Market Size," Economic Journal, Royal Economic Society, vol. 102(411), pages 402-414, March.
    8. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Claudiu Tiberiu Albulescu & Daniel Goyeau, 2016. "The interaction between trade and FDI: the CEE countries experience," Papers 1609.02334, arXiv.org.
    2. Monireh Rafat, 2017. "The Interactive Relationship between Regional Trade Integration and Foreign Direct Investment," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 21(4), pages 809-828, Autumn.
    3. M. Emranul Haque & Arijit Mukherjee & Burcu Senalp, 2017. "Trade Cost Reduction and Foreign Direct Investment in a Vertical Structure," CESifo Working Paper Series 6689, CESifo.
    4. Pontes, Jose Pedro, 2007. "A non-monotonic relationship between FDI and trade," Economics Letters, Elsevier, vol. 95(3), pages 369-373, June.
    5. Henri Bezuidenhout & Wim Naudé, 2008. "Foreign Direct Investment and Trade in the Southern African Development Community," WIDER Working Paper Series RP2008-88, World Institute for Development Economic Research (UNU-WIDER).
    6. Jose Pedro Pontes, 2006. "FDI and trade: complements and substitutes," Working Papers Department of Economics 2006/03, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    7. Claudiu Tiberiu Albulescu & Daniel Goyeau, 2019. "The interaction between trade and FDI: The CEECs experience," International Economics and Economic Policy, Springer, vol. 16(3), pages 489-509, July.

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    More about this item

    Keywords

    foreign direct investment; multinationals; trade; intermediate goods; non cooperative games.
    (this abstract was borrowed from another version of this item.)    ;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F1 - International Economics - - Trade

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