Modes of Foreign Direct Investment and Patterns of Trade: An Alternative Empirical Approach

21 Pages Posted: 14 Aug 2015

See all articles by Innwon Park

Innwon Park

Korea University

Soonchan Park

Kongju National University

Date Written: August 2015

Abstract

Modes of FDI can be clarified by analysing the changing patterns of trade among host, home and third countries. However, most empirical experiments of foreign direct investment (FDI) determinants have been confined to general characteristics of host countries and multinational enterprises' outward investment activities. This may not clearly characterise the specific characteristics of inward FDI in regard to the host country. Thus, we introduce an alternative approach to clarify modes of FDI by investigating the link between patterns of trade and inward FDI. To empirically test whether our approach is applicable, we choose China during the period 1998–2007. We construct a modified gravity equation of bilateral trade while considering spatially lagged interdependence between host, home and third countries. The problem of endogeneity is controlled by applying the system generalised method of moments (GMM) estimation technique. Our findings are consistent with results in existing studies on modes of outward FDI to China and prove that our approach in dealing with the link between patterns of trade and inward FDI has wide applicability to all modes of FDI. We discover there is strong evidence for statistically significant complementarity between bilateral trade and inward FDI within the aggregate trade data. As we decompose the aggregate trade data into final and intermediate goods, we find the motivation concerning export‐platform and complex vertical FDI is very significant. In addition, as we separate the bilateral partners into developing partners and developed partners, we find both bilateral and multilateral linkages are much stronger with developing partners.

Suggested Citation

Park, Innwon and Park, Soonchan, Modes of Foreign Direct Investment and Patterns of Trade: An Alternative Empirical Approach (August 2015). The World Economy, Vol. 38, Issue 8, pp. 1225-1245, 2015. Available at SSRN: https://ssrn.com/abstract=2643908 or http://dx.doi.org/10.1111/twec.12293

Innwon Park (Contact Author)

Korea University ( email )

Soonchan Park

Kongju National University ( email )

527 Yesan
340-800 Choongnam
Korea

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
142
PlumX Metrics