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An Empirical Assessment of a Tradeoff Between FDI and Exports

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  • Hongshik Lee

    (Korean Institute for International Economic Policy)

  • Joon Hyung Lee
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    Abstract

    The relation between exports and FDI could be complementary or substitutable depending on the types of FDI. Overseas investment to displace exports must have a substitution relation while FDI for vertical fragmentation between countries would boost the home export. Empirical studies have generally found a positive relation and finding a substitution relation is relatively recent. We investigate the relation between those two variables using detailed information of Korean multinational firms and their foreign affiliates from 1999 to 2004. In so doing, unlike previous studies, we consider the host countrys income level and various activities of each affiliate, whether it serves the host country or exports outside in particular. The complementary relation is found by simply following previous studies. Once we consider the host countrys income level and various activities of each affiliate, however, different results are produced. Our empirical results show substitution if the affiliates are located in a developed country and mainly serve the host country, while complementarity if the affiliates export their products outside of the host country. Moreover, the complementary effect is strengthened if they are located in a less developed country.

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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 22009.

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    Date of creation: Jan 2007
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    Handle: RePEc:eab:tradew:22009

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    1. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, Elsevier, vol. 140(1), pages 260-281, September.
    2. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, Elsevier, vol. 51(5), pages 1303-1325, July.
    3. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 300-316, March.
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    Cited by:
    1. Yann Duval, 2008. "Trade and Investment Linkages and Policy Coordination: Lessons from Case Studies in Asian Developing Countries," Working Papers, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada. 5508, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..

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