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FDI and Trade – Two Way Linkages?

Author

Listed:
  • Joshua Aizenman

    (Department of Economics, University of California at Santa Cruz)

  • Ilan Noy

    (Department of Economics, University of Hawaii at Manoa)

Abstract

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.

Suggested Citation

  • Joshua Aizenman & Ilan Noy, 2005. "FDI and Trade – Two Way Linkages?," Working Papers 200505, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:200505
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    More about this item

    Keywords

    financial openness; commercial openness; trade; foreign direct investment;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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