Trade through FDI: investing in services
The type of relationship between different modes of trading services internationally is of great interest, both for the academic literature and for liberalization policies under the GATS, because cross-border and commercial presence abroad might complement or substitute each other. This paper offers a consistent theoretical foundation for the application of the gravity model to services trade, using a composite demand model yielding testable hypothesis about that complementary or substitutive relationship and linking the results to market regulations as trade barriers. For the OECD countries over 1994-2004 a robust complementary effects in the short-run is found, reinforced in the long-run by an increased potential for cross-border imports bases on pervious FDI inflows, highlighting business, communication and financial services.
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