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In Search of Substitution Between Foreign Production and Exports

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  • Bruce A. Blonigen

Abstract

Are foreign production and exports substitutes or complements? The continuing globalization of production makes the question of the relationship between trade and foreign direct investment ever more important. Standard theory of the multinational corporation (MNC) assumes substitution, while previous empirical work examining the relationship has generally found strong evidence of complementarity. This study examines product-level data, which more closely fits the assumption of a single-product firm often used in MNC theory, and finds substantial evidence for both a substitution and a complementarity effect between affiliate production and exports with Japanese automobile parts for the U.S. market. I also test for and find evidence of substitution using product-level data on a set of Japanese-produced final consumer goods. Thus, product-level data allows one to separately identify substitution from complementarity effects (here from vertical production relationships), rather than try to infer them from estimates using more aggregate data. In this sense, the paper highlights the importance of matching the level of data aggregation with the hypotheses being tested. This is particularly true at a time when there is an increasing proliferation of available microeconomic data in the field of international economics.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7154.

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Date of creation: Jun 1999
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Publication status: published as Blonigen, Bruce A. "In Search Of Substitution Between Foreign Production And Exports," Journal of International Economics, 2001, v53(1,Feb), 81-104.
Handle: RePEc:nbr:nberwo:7154

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  1. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November.
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