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Trade in Services: Cross-Border Trade vs. Commercial Presence. Evidence of Complementarity

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  • Carolina Lennon

    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

This paper investigates empirically the relationship between trade and FDI in services. Using bilateral data on US foreign affiliates' sales and trade as well as data on barriers to FDI, the relationship is investigated using different panel techniques, including fixed effects and pseudo-maximum-likelihood techniques. As a first step, bilateral exports are explained by foreign affiliates' sales. Then, in order to control for endogeneity, a cross-price elasticity approach is used, in which exports are explained by the cost of investing abroad. The paper additionally investigates whether the relationship in services differs from that in goods, whether it depends on the motivations for FDI and varies across services. The main findings indicate a robust complementary relationship between trade and FDI in services, which is higher than that found in the goods case and mainly related to the horizontal type of FDI as well as to 'other private services'.

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Bibliographic Info

Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Working Papers with number 59.

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Length: 42 pages including 14 Tables and 5 Figures
Date of creation: Nov 2009
Date of revision:
Publication status: Published as wiiw Working Paper
Handle: RePEc:wii:wpaper:59

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Keywords: international trade in services; modes of supply; FDI;

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References

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  1. Carmen Fillat-Castejón & Joseph F. Francois & Julia Wörz, 2009. "Cross-Border Trade and FDI in Services," wiiw Working Papers 50, The Vienna Institute for International Economic Studies, wiiw.
  2. Buch, Claudia M. & Lipponer, Alexander, 2007. "FDI versus exports: Evidence from German banks," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 805-826, March.
  3. Lipsey, Robert E & Weiss, Merle Yahr, 1981. "Foreign Production and Exports in Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 488-94, November.
  4. Rupa Chanda, 2006. "Inter-modal Linkages in Services Trade," OECD Trade Policy Papers 30, OECD Publishing.
  5. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  6. Anne-Célia Disdier & Keith Head, 2004. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," Development Working Papers 186, Centro Studi Luca d\'Agliano, University of Milano.
  7. Gene M. Grossman & Elhanan Helpman & Adam Szeidl, 2003. "Optimal Integration Strategies for the Multinational Firm," Working Papers 142, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  8. Caroline Freund & Diana Weinhold, 2002. "The Internet and International Trade in Services," American Economic Review, American Economic Association, vol. 92(2), pages 236-240, May.
  9. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
  10. Blonigen, Bruce A., 2001. "In search of substitution between foreign production and exports," Journal of International Economics, Elsevier, vol. 53(1), pages 81-104, February.
  11. Donghui Li & Fariborz Moshirian & Ah-Boon Sim, 2003. "The Determinants of Intra-Industry Trade in Insurance Services," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(2), pages 269-287.
  12. Clausing, Kimberly A, 2000. "Does Multinational Activity Displace Trade?," Economic Inquiry, Western Economic Association International, vol. 38(2), pages 190-205, April.
  13. 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.
  14. Moshirian, Fariborz & Li, Donghui & Sim, Ah-Boon, 2005. "Intra-industry trade in financial services," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1090-1107, November.
  15. Langhammer, Rolf J., 2005. "The EU offer of service trade liberalization in the Doha Round : evidence of a not-yet-perfect customs union," Open Access Publications from Kiel Institute for the World Economy 3509, Kiel Institute for the World Economy (IfW).
  16. Amiti, Mary & Wakelin, Katharine, 2003. "Investment liberalization and international trade," Journal of International Economics, Elsevier, vol. 61(1), pages 101-126, October.
  17. Head, Keith & Ries, John, 2001. "Overseas Investment and Firm Exports," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 108-22, February.
  18. Carolina Lennon, 2009. "Trade in Services and Trade in Goods: Differences and Complementarities," wiiw Working Papers 53, The Vienna Institute for International Economic Studies, wiiw.
  19. Keith Head & John Ries, 2004. "Exporting and FDI as Alternative Strategies," Oxford Review of Economic Policy, Oxford University Press, vol. 20(3), pages 409-423, Autumn.
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Citations

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Cited by:
  1. Damien Broussolle, 2012. "A note on the links between manufacturing, goods and services exports," Working Papers of LaRGE Research Center 2012-09, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  2. Markus Kelle & Jörn Kleinert & Horst Raff & Farid Toubal, 2012. "Cross-Border and Foreign-Affiliate Sales of Services: Evidence from German Micro-Data," Development Working Papers 335, Centro Studi Luca d\'Agliano, University of Milano, revised 16 Jul 2012.
  3. Erik van der Marel, 2011. "Determinants of comparative advantage in services," LSE Research Online Documents on Economics 38993, London School of Economics and Political Science, LSE Library.
  4. Ranjan Dash & P. Parida, 2013. "FDI, services trade and economic growth in India: empirical evidence on causal links," Empirical Economics, Springer, vol. 45(1), pages 217-238, August.
  5. Markus Kelle & Jörn Kleinert, 2010. "German Firms in Service Trade," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(1), pages 51-72.

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