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Reverse Importing and Asymmetric Trade and FDI: A Networks Explanation

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  • Theresa Greaney

    ()
    (Department of Economics, University of Hawaii at Manoa)

Abstract

This paper considers the impact of business and social networks on international trade and foreign direct investment (FDI). I propose that differences in the strength of network effects across countries can produce asymmetric trade and investment flows that may lead to trade friction. This proposition is examined using a model of multi-product producers of a differentiated product. A firm from a country with strong network effects has a cost advantage in selling to buyers from its own country. This advantage results in lower inward FDI, lower total imports but larger volumes of reverse imports (i.e., imports from overseas affiliates of that country’s own firms) into the country with strong network effects. The model’s predictions match observed asymmetric trade and investment flows that sometimes lead to US-Japan trade friction in industries such as automobiles.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_02-15.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200215.

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Length: 37 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:hai:wpaper:200215

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Keywords: Multinational corporations; Intra-industry Trade; Foreign Direct Investment; Reverse Imports; Networks;

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References

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  1. Baldwin, Richard & Ottaviano, Gianmarco Ireo Paolo, 1998. "Multiproduct Multinationals and Reciprocal FDI Dumping," CEPR Discussion Papers 1851, C.E.P.R. Discussion Papers.
  2. Brander, James A & Eaton, Jonathan, 1984. "Product Line Rivalry," American Economic Review, American Economic Association, vol. 74(3), pages 323-34, June.
  3. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  4. Greaney, Theresa M., 2003. "Reverse importing and asymmetric trade and FDI: a networks explanation," Journal of International Economics, Elsevier, vol. 61(2), pages 453-465, December.
  5. Spencer, Barbara J & Qiu, Larry D, 2001. "Keiretsu and Relationship-Specific Investment: A Barrier to Trade?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 871-901, November.
  6. Bruce A. Blonigen, 1999. "In Search of Substitution Between Foreign Production and Exports," NBER Working Papers 7154, National Bureau of Economic Research, Inc.
  7. K.C. Fung, 1991. "Characteristics of Japanese Industrial Groups and Their Potential Impact on U. S . - Japanese Trade," NBER Chapters, in: Empirical Studies of Commercial Policy, pages 137-168 National Bureau of Economic Research, Inc.
  8. Casella, Alessandra & Rauch, James E., 2002. "Anonymous market and group ties in international trade," Journal of International Economics, Elsevier, vol. 58(1), pages 19-47, October.
  9. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  10. Greaney, Theresa M., 2000. "Righting past wrongs: can import promotion policies counter hysteresis from past trade protection in the presence of switching costs?," Japan and the World Economy, Elsevier, vol. 12(3), pages 211-227, September.
  11. Keith Head & John Ries, 1998. "Immigration and Trade Creation: Econometric Evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 47-62, February.
  12. James E. Rauch & Vitor Trindade, 1999. "Ethnic Chinese Networks in International Trade," NBER Working Papers 7189, National Bureau of Economic Research, Inc.
  13. Greaney, Theresa M., 2001. "Promoting Imports to Appease Trade Partners: Japan's New Trade Policies," Journal of the Japanese and International Economies, Elsevier, vol. 15(3), pages 253-270, September.
  14. Gould, David M, 1994. "Immigrant Links to the Home Country: Empirical Implications for U.S. Bilateral Trade Flows," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 302-16, May.
  15. James E. Rauch, 1996. "Trade and Search: Social Capital, Sogo Shosha, and Spillovers," NBER Working Papers 5618, National Bureau of Economic Research, Inc.
  16. Greaney, Theresa M., 1997. "A model of decentralized multinational investment in product development activities," Japan and the World Economy, Elsevier, vol. 9(3), pages 315-333, August.
  17. Asanuma, Banri, 1989. "Manufacturer-supplier relationships in Japan and the concept of relation-specific skill," Journal of the Japanese and International Economies, Elsevier, vol. 3(1), pages 1-30, March.
  18. Feenstra, Robert C. & Rauch, James E., 1999. "Symposium on business and social networks in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 1-1, June.
  19. McLaren, J, 1996. "Supplier Relations and the Market Context : A Theory of Handshakes," Papers 766, Yale - Economic Growth Center.
  20. Sheard, P., 1992. "Keiretsu and Closedness on the Japanese Market: A Economic Appraisal," ISER Discussion Paper 0273, Institute of Social and Economic Research, Osaka University.
  21. Head, Keith & Ries, John, 2001. "Overseas Investment and Firm Exports," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 108-22, February.
  22. Robert Z. Lawrence, 1991. "Efficient or Exclusionist: The Import Behavior of Japanese Corporate Groups," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 311-341.
  23. repec:fth:osakae:273 is not listed on IDEAS
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