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Do Overseas investments create or replace trade? New insights from a macro-sectoral study on Japan

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  • Raphaël Chiappini

    () (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)

Abstract

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 exports 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 equipement 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.

Suggested Citation

  • Raphaël Chiappini, 2013. "Do Overseas investments create or replace trade? New insights from a macro-sectoral study on Japan," Working Papers hal-00854109, HAL.
  • Handle: RePEc:hal:wpaper:hal-00854109
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00854109
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    Keywords

    Exports; imports; outward foreign direct investment (FDI); Poisson pseudo-maximum likelihood (PPML);

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