FDI-Trade Nexus: New Evidence from Product-Level Data

The difficulty in finding the substitution effects on exports of foreign direct investment has posed challenges to empirical analysts. In analysing newly-constructed product-level data that enable endogeneity and aggregation bias to be addressed simultaneously, this study finds that auto part exports from Japan are positively correlated with overseas operations by Japanese automakers but negatively correlated with overseas operations by Japanese suppliers. However, the evidence on the latter is rather weak consistent with the fact that Japanese suppliers predominantly sell their products to Japanese automakers at the initial stage but that they are expanding their business with non-Japanese firms in host countries over time.