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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. 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.
  2. Barbara J. Spencer & Larry D. Qiu, 2000. "Keiretsu and Relationship-Specific Investment: A Barrier to Trade?," NBER Working Papers 7572, National Bureau of Economic Research, Inc.
  3. James Brander & Jonathan Eaton, 1982. "Product Line Rivalry," Working Papers 519, Queen's University, Department of Economics.
  4. McLaren, John, 1999. "Supplier relations and the market context: A theory of handshakes," Journal of International Economics, Elsevier, vol. 48(1), pages 121-138, June.
  5. Head, Keith & Ries, John, 2001. "Overseas Investment and Firm Exports," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 108-22, February.
  6. Alessandra Casella & James E. Rauch, 1997. "Anonymous Market and Group Ties in International Trade," NBER Working Papers 6186, National Bureau of Economic Research, Inc.
  7. 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.
  8. Bruce A. Blonigen, 1999. "In Search of Substitution Between Foreign Production and Exports," NBER Working Papers 7154, National Bureau of Economic Research, Inc.
  9. Baldwin, Richard E. & Ottaviano, Gianmarco I. P., 2001. "Multiproduct multinationals and reciprocal FDI dumping," Journal of International Economics, Elsevier, vol. 54(2), pages 429-448, August.
  10. 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.
  11. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  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., 2003. "Reverse importing and asymmetric trade and FDI: a networks explanation," Journal of International Economics, Elsevier, vol. 61(2), pages 453-465, December.
  14. 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.
  15. repec:fth:osakae:273 is not listed on IDEAS
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
  21. 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.
  22. 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.
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Citations

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Cited by:
  1. 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.
  2. Mukherjee, Arijit, 2013. "Endogenous domestic market structure and the effects of a trade cost reduction in a unionised industry," Economic Modelling, Elsevier, vol. 32(C), pages 30-33.
  3. Theresa M. Greaney, 2004. "Measuring network effects on trade: are Japanese affiliates distinctive?," Hi-Stat Discussion Paper Series d04-57, Institute of Economic Research, Hitotsubashi University.
  4. Arribas Fernández Iván & Pérez García Francisco & Tortosa-Ausina Emili, 2008. "On the Dynamics of Globalization," Working Papers 201088, Fundacion BBVA / BBVA Foundation.
  5. Shuhei Nishitateno, 2012. "Global Production Sharing in the Japanese Automobile Industry: A Comparative Analysis," Departmental Working Papers 2012-02, The Australian National University, Arndt-Corden Department of Economics.
  6. Arribas Fernández Iván & Pérez García Francisco & Tortosa-Ausina Emili, 2007. "Measuring International Economic Integration: Theory and Evidence of Globalization," Working Papers 201094, Fundacion BBVA / BBVA Foundation.
  7. Mukherjee, Arijit & Suetrong, Kullapat, 2012. "Trade cost reduction and foreign direct investment," Economic Modelling, Elsevier, vol. 29(5), pages 1938-1945.
  8. Bruce A. Blonigen & Rossitza B. Wooster, 2003. "CEO Turnover and Foreign Market Participation," University of Oregon Economics Department Working Papers 2003-24, University of Oregon Economics Department, revised 01 Mar 2003.
  9. Jinjarak, Yothin, 2007. "Foreign direct investment and macroeconomic risk," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 509-519, September.
  10. Beladi, Hamid & Mukherjee, Arijit, 2012. "Footloose foreign firm and profitable domestic merger," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 186-194.
  11. Xing, Yuqing & Zhao, Laixun, 2008. "Reverse imports, foreign direct investment and exchange rates," Japan and the World Economy, Elsevier, vol. 20(2), pages 275-289, March.
  12. Kyoji Fukao; Toshihiro Okubo, 2004. "Why Has the Border Effect in the Japanese Market Declined?," IHEID Working Papers 12-2004, Economics Section, The Graduate Institute of International Studies.
  13. Greaney, Theresa M., 2009. "Measuring network effects on trade: A reexamination," Japan and the World Economy, Elsevier, vol. 21(3), pages 219-225, August.
  14. Toshihiro Okubo, 2004. "Intra-industry Trade and Production Networks," IHEID Working Papers 13-2004, Economics Section, The Graduate Institute of International Studies.
  15. Belderbos, René & Wakasugi, Ryuhei & Zou, Jianglei, 2012. "Business groups, foreign direct investment, and capital goods trade: The import behavior of Japanese affiliates," Journal of the Japanese and International Economies, Elsevier, vol. 26(2), pages 187-200.
  16. Arribas, Iván & Pérez, Francisco & Tortosa-Ausina, Emili, 2009. "Measuring Globalization of International Trade: Theory and Evidence," World Development, Elsevier, vol. 37(1), pages 127-145, January.
  17. Belderbos, Rene & Wakasugi, Ryuhei & Zou, Jianglei, 2010. "Business groups, foreign direct investment, and capital goods trade: The import behavior of Japanese affiliates," MERIT Working Papers 066, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

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