A Theory of the Relationship Between Foreign Direct Investment and Trade
Although empirical evidence shows that the relationship between foreign direct investment (FDI) and trade is complex, theories of international investment (both vertical and horizontal) present simple patterns of relation.By allowing for different locations of vertically-related stages of production and distinguishing between trade in finished goods and trade in intermediate goods, this paper introduces a nonmonotonic relationship between multinational firms and trade costs, which must be neither too high nor too low for FDI to arise. Exports and FDI behave as complements for high level of trade costs and as substitutes otherwise.
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3445092, Harvard University Department of Economics.
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- Rowthorn, R E, 1992. "Intra-industry Trade and Investment under Oligopoly: The Role of Market Size," Economic Journal, Royal Economic Society, vol. 102(411), pages 402-14, March.
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