FDI and Trade - Two Way Linkages?

UCSC Center for International Economics (SCCIE) Working Paper No. 05-09; UCSC Department of Economics Working Paper No. 598

36 Pages Posted: 11 May 2005

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Ilan Noy

Victoria University of Wellington

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

The purpose of this paper is to investigate the intertemporal linkages between FDI and disaggregated measures of international trade. We outline a model exemplifying some of these linkages, describe several methods for investigating two-way feedbacks between various categories of trade, and apply them to the recent experience of developing countries. After controlling for other macroeconomic and institutional effects, we find that the strongest feedback between the sub-accounts is between FDI and manufacturing trade. More precisely, applying Geweke (1982)'s decomposition method, we find that most of the linear feedback between trade and FDI (81%) can be accounted for by Granger-causality from FDI gross flows to trade openness (50%) and from trade to FDI (31%). The rest of the total linear feedback is attributable to simultaneous correlation between the two annual series.

Keywords: Financial openness, commercial openness, trade, foreign direct investment

JEL Classification: F15, F21, F36, H21

Suggested Citation

Aizenman, Joshua and Noy, Ilan, FDI and Trade - Two Way Linkages? (May 2005). UCSC Center for International Economics (SCCIE) Working Paper No. 05-09; UCSC Department of Economics Working Paper No. 598, Available at SSRN: https://ssrn.com/abstract=719706 or http://dx.doi.org/10.2139/ssrn.719706

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ilan Noy

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

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