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International trade and factor mobility: an empirical investigation

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  • Linda S. Goldberg
  • Michael W. Klein

Abstract

Foreign Direct Investment (FDI) has been growing rapidly, at a pace far exceeding the growth in international trade. Thus, a full understanding of the relationship between trade in goods and FDI is important for obtaining a complete picture of the extent and sources of international linkages. We investigate whether FDI serves as a complement to trade or a substitute for trade based on the effects identified by the Rybczynski theorem whereby an increase in a factor of production used intensively in one sector affects production both in that sector and in other sectors. Using detailed data on bilateral capital and trade flows between the United States and individual Latin American countries, we examine the linkages between FDI into particular sectors of Latin American economies and the net exports of those and other manufacturing sectors. We find that FDI from the United States can lead to significant, and varied, shifts in the composition of activity in many Latin American countries and across many manufacturing industries.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 81.

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Date of creation: 1999
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Handle: RePEc:fip:fednsr:81

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Keywords: International trade ; Investments; Foreign ; Latin America;

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References

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  1. Douglas D. Purvis, 1971. "Technology, Trade and Factor Mobility," Working Papers 54, Queen's University, Department of Economics.
  2. Linda S. Goldberg & Michael Klein, 1996. "Foreign direct investment, trade, and real exchange rate linkages in developing countries," Proceedings, Federal Reserve Bank of San Francisco, pages 73-100.
  3. Svensson, Lars E.O., 1984. "Factor trade and goods trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 365-378, May.
  4. Michael W. Klein & Eric Rosengren, 1992. "The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects," NBER Working Papers 4192, National Bureau of Economic Research, Inc.
  5. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November.
  6. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  7. Robert E. Lipsey, 2000. "The Role of Foreign Direct Investment in International Capital Flows," NBER Working Papers 7094, National Bureau of Economic Research, Inc.
  8. Collins, William J & O'Rourke, Kevin H & Williamson, Jeffrey G, 1997. "Were Trade and Factor Mobility Substitutes in History?," CEPR Discussion Papers 1661, C.E.P.R. Discussion Papers.
  9. Schmitz, Andrew & Helmberger, Peter, 1970. "Factor Mobility and International Trade: The Case of Complementarity," American Economic Review, American Economic Association, vol. 60(4), pages 761-67, September.
  10. Kloek, T, 1981. "OLS Estimation in a Model Where a Microvariable Is Explained by Aggregates and Contemporaneous Disturbances Are Equicorrelated," Econometrica, Econometric Society, vol. 49(1), pages 205-07, January.
  11. Markusen, James R., 1983. "Factor movements and commodity trade as complements," Journal of International Economics, Elsevier, vol. 14(3-4), pages 341-356, May.
  12. Wong, Kar-yiu, 1986. "Are international trade and factor mobility substitutes?," Journal of International Economics, Elsevier, vol. 21(1-2), pages 25-43, August.
  13. Markusen, James R & Svensson, Lars E O, 1985. "Trade in Goods and Factors with International Differences in Technology," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 175-92, February.
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