A General Equilibrium Analysis of the Interplay between Foreign Direct Investment and Trade Adjustments

Abstract

The theoretical literature on trade and foreign direct investment (FDI) indicates that they could be either substitutes or complements. The empirical evidence on U.S.-Japan and APEC countries suggests that trade and FDI exhibit a complementary relationship. In this paper, we employ a six-region applied general equilibrium model that incorporates FDI to evaluate the impact of APEC trade and investment liberalization on output and the interplay between FDI and trade adjustments. The preliminary results suggest that FDI liberalization would bring about greater benefits to most of the APEC economies than trade liberalization. In the manufacturing sector, trade and FDI are found to be complements in the APEC regions.

Keywords: APEC liberalization, foreign direct investment, CGE model

JEL Classification: F13, F15, F21, O53