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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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Bibliographic Info

Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2003/11.

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Date of creation: 2003
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Handle: RePEc:ise:isegwp:wp112003

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Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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  1. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  2. 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.
  3. Nigel Pain, 2003. "What Determines Industrial R&D Expenditure in the UK?," NIESR Discussion Papers 131, National Institute of Economic and Social Research.
  4. 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.
  5. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  6. 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 402-14, March.
  7. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
  8. 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.
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Cited by:
  1. Bezuidenhout, Henri & Naude, Wim, 2008. "Foreign Direct Investment and Trade in the Southern African Development Community," Working Paper Series RP2008/88, World Institute for Development Economic Research (UNU-WIDER).
  2. Jose Pedro Pontes, 2006. "FDI and trade: complements and substitutes," Working Papers Department of Economics 2006/03, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

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