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
Date Written: May 2005
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: Suggested Citation