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Do Overseas Investments Create or Replace Trade? New insights from a Macro-Sectoral Study on Japan

  • Raphaël Chiappini

This paper investigates the relationship between outward foreign direct investment (FDI) and both exports and imports from Japan. Using the Poisson pseudomaximum likelihood (PPML) estimator developed by Santos Silva and Tenreyro (2006) to deal with the problem of zero trade flows when estimating a gravity equation, we show that the complementary relationship between FDI and trade is overestimated when using the Ordinary Least Square (OLS) estimator. The PPML method also allows sectoral estimation of the relationship. We find that whether outward FDI creates or replaces trade depends on the industry under scrutiny. Our results indicate that the complementary relationship between FDI and trade is dominant in the Japanese manufacturing sector, especially in electric machinery, transportation equipment, and precision machinery. We find also that Japanese overseas investments substitute for exports in chemicals products, and for both exports and imports in general machinery.

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File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2013-24.pdf
File Function: Revised version, 2014
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Paper provided by Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis in its series GREDEG Working Papers with number 2013-24.

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Length: 27 pages
Date of creation: Jun 2013
Date of revision: Mar 2014
Handle: RePEc:gre:wpaper:2013-24
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