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FDI and Trade – Two Way Linkages?

  • Aizenman, Joshua
  • Noy, Ilan

The purpose of this paper is to investigate the intertemporal linkages between FDI and disaggregated measures of international trade. We outline a model exemplifying some of these linkages, describe several methods for investigating two-way feedbacks between various categories of trade, and apply them to the recent experience of developing countries. After controlling for other macroeconomic and institutional effects, we find that the strongest feedback between the sub-accounts is between FDI and manufacturing trade. More precisely, applying Geweke (1982)’s decomposition method, we find that most of the linear feedback between trade and FDI (81%) can be accounted for by Granger-causality from FDI gross flows to trade openness (50%) and from trade to FDI (31%). The rest of the total linear feedback is attributable to simultaneous correlation between the two annual series.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt301285n0.

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Date of creation: 01 May 2005
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Handle: RePEc:cdl:ucscec:qt301285n0
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  1. Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
  2. Bruce A. Blonigen & Miao Wang, 2004. "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," Working Papers and Research 0903, Marquette University, Center for Global and Economic Studies and Department of Economics.
  3. César Calderón & Lin Liu, 2002. "The Direction of Causality Between Financial Development and Economic Growth," Working Papers Central Bank of Chile 184, Central Bank of Chile.
  4. Efraim Sadka & Assaf Razin & Yona Rubinstein, 2004. "Which Countries Export FDI, and How Much?," 2004 Meeting Papers 226, Society for Economic Dynamics.
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  10. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2005. "World market integration through the lens of foreign direct investors," Journal of International Economics, Elsevier, vol. 66(2), pages 267-295, July.
  11. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
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  14. International Monetary Fund, 2004. "Risk Instability and the Pattern of Foreign Direct Investment in the Middle East and North Africa Region," IMF Working Papers 04/139, International Monetary Fund.
  15. repec:cup:cbooks:9780521002882 is not listed on IDEAS
  16. Deborah L. Swenson, 2004. "Foreign Investment and the Mediation of Trade Flows," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 609-629, 09.
  17. Dreher, Axel & Siemers, Lars-H. R., 2005. "The Intriguing Nexus between Corruption and Capital Account Restrictions," RWI Discussion Papers 35, Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI).
  18. Do, Quy-Toan & Levchenko, Andrei A., 2004. "Trade and financial development," Policy Research Working Paper Series 3347, The World Bank.
  19. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," Research Department Publications 4032, Inter-American Development Bank, Research Department.
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  23. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations," Working Papers 200404, University of Hawaii at Manoa, Department of Economics.
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